Has your succession planning come to a standstill and you don’t know why or how to fix it? Fear, confusion, uncertainty, an undefined action plan and/or dysfunction within the family or business can all be contributors.
“Not every business struggles with all five of these challenges, but I usually see a number of them in almost every situation when succession efforts have stalled,” says Ricci M. Victorio, CSP, CPCC, managing partner at Mosaic Family Business Center.
Smart Business spoke with Victorio about five reasons succession plans stall and ways to overcome them.
What causes succession planning to stall?
Succession is about transforming the entire organization, not just transitioning a business from one person to the next. Shareholders, family members and key managers need to buy-in to the transition plan or they may undermine your efforts.
Business owners dealing with multiple issues stalling a succession plan shouldn’t feel doomed. You are not alone and there are professionals who can help you get unstuck. A succession coach or adviser can help guide your company through the emotional issues of this transition and identify early warning signs to prevent a smoldering fire from becoming a five-alarm blaze.
What are the common hang-ups and how can they be overcome?
Fear appears in many forms. In a family business it can encompass the fear of failing your family’s expectations or uncertainty about sufficient leadership skills. Such fears can transform into overwhelming doubts. Parents may fear sharing financial information with their children because of worries over perceptions of inequality in their estate plan. When talking about money and careers, familial bickering and artificial harmony replace understanding and trust. A coach can provide guidance in discussing emotional topics without confrontation, how to stay open, asking questions and considering differing opinions without blowing up.
Confusion often comes from being afraid to communicate or commit to action. Without clear communication or an execution plan, key personnel and family will become anxious worrying what is going to happen, who is actually in charge and how it will affect their security, which creates the added stress of business productivity going flat. By creating a timetable, sharing it with family, employees, your vendors and clients, and working with them to make sure it is clearly understood, you can sidestep this challenge.
Uncertainty over the economy and the business’ success has hindered many plans. You may be worried about the business value or if your successor can manage a significant bank loan. For family members, consider using a stock redemption program rather than a straight buyout, lock in key managers with a vested retirement plan, make sure you have a successor development plan and hire the best talent possible for the transition.
An undefined action plan can lead to skipped steps or no follow-through. The succession plan should be integrated into your strategic plan with specific and documented expectations, a timeline, ways to measure success and regular checkups.
Dysfunction — infighting, jealousy, sibling rivalry, secrecy and entitlement will stall family business succession. When relationships are out of alignment, people need to be heard, acknowledged and feel like they are making a contribution in dealing with important issues. Afterward, it’s possible the succession plan may look different than parents originally intended, but you will most likely have everyone on board, moving together. Even in a non-family business, not addressing existing dysfunction could lead to a failed succession effort.
There is a plan for every situation, but there is no standard solution. When your plan stalls, don’t be embarrassed to get help. Succession requires a great team, which includes the transactional assistance from your attorney and CPA, advice from your financial planner and a succession coach who focuses on the transformational goal of achieving a successful business transition while preserving family harmony.
Ricci M. Victorio, CSP, CPCC, is managing partner at Mosaic Family Business Center. Reach her at (415) 788-1952 or firstname.lastname@example.org.
Website: More tips on how to have a successful succession transition.
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
The topic of succession planning had been on the table for quite some time for Andy Morrison and his fellow co-founders at Market Strategies International. But it wasn’t until 2006 that the clock really started ticking.
“We started to understand, really around 2000, that as we matured in the business, it was time for us to start thinking about who would be our successors, really under the condition that we wanted the firm to remain independent,” Morrison says. “That is when we started to think about a succession plan and a succession strategy for our positions.
“But in 2006, we acquired a private equity partner, Veronis Suhler Stevenson, and that was really the second stage of succession planning because now we had an outside partner and a board of directors.”
As a component of the partnership, Veronis Suhler Stevenson mandated that Market Strategies look for add-on acquisitions, particularly companies that had younger leadership.
“That was a main part of the criteria for any acquisition, that we find young-but-seasoned management who would be in the business for a considerable period of time and could potentially become companywide leaders once they joined our organization,” Morrison says.
In 2007, Market Strategies acquired Doxus, a marketing and product strategy consulting firm, bringing Rob Stone into the fold. Morrison and the leadership team quickly identified Stone as someone with high growth potential in a leadership role and began grooming him in an executive vice president’s role.
In February, Morrison — the company’s CEO since 1994 — decided to step down, effective March 31, transitioning into the chairman’s role. Satisfied with Stone’s development, the leadership team offered Stone the CEO’s position, which he readily accepted.
That’s the short version. In reality, it wasn’t as simple as Morrison stepping down and Stone stepping up. Over the course of many months, Morrison and Stone worked together, along with the rest of Market Strategies’ executive team, to develop and execute a detailed succession plan that fell in line with the overall goals of the market research and consulting firm and to communicate it to everyone in the company.
Lay the groundwork
A good succession plan is a road map. It shows you where you need to go and what possible routes you can take to get there, so that you and your team can plan the safest and most prudent route for your business.
The preparedness of the leadership team is something that made an immediate impression on Stone when he joined Market Strategies in 2007.
“That is one of the factors that worked well in our favor,” Stone says. “Andy and the entire cohort of founding managers have always been very transparent in the company regarding what their plans are, what the timelines are — because it is critical for people to understand what the road map looks like so that these sorts of changes don’t come as a surprise.”
The transparency is the result of an ongoing dialogue among the top managers in the company. The communication among the members of the management team gave Stone and George Wilkerson — who was named president at the same time Stone was named CEO — an opportunity to have a voice in the decision-making process as the future of the company took shape.
“There is a level of unnecessary surprise that can mar succession planning,” Stone says. “The communication process, which allowed myself and George to be completely invested and present in the key strategic decisions that the company has been making, helped remove that. It also has helped us to be more available and present to the staff at large.
“It has always been clear to our people as to who has an ongoing voice in the management of the company, who were the people on the executive committee and who were the people authoring the strategic three-year plans.”
Even though Stone and Wilkerson were involved as members of the leadership team, their consideration for the top spots in the organization wasn’t automatic. Market Strategies conducted a lengthy search that narrowed the field down, first to an internally focused search, and then specifically to Stone and Wilkerson.
Morrison and his team initially looked at candidates both inside and outside the organization. They wanted their ideal candidates to possess a number of qualities, including areas of expertise that Morrison’s team didn’t possess, such as experience with international markets.
Developing a list of essential qualities that every leadership candidate must have is a critical component to the hiring process. Along with international experience, Morrison and his team constructed a list of other qualities needed to successfully lead Market Strategies, which generated $75 million in revenue during 2011, Morrison’s final full year as CEO.
“On the established leadership team, we knew we had to think about who the replacements might be, and that was very much spurred by the integration process,” Morrison says. “We knew we wanted to add younger businesspeople who had played a big part in running their own companies. They knew how to meet a payroll, they knew what it takes to manage a business.”
However, along with the valuable experience and skills comes baggage. Incoming leaders learn how to manage according to the rules of their previous company, and assimilating them can take a certain amount of deprogramming and reprogramming.
“The baggage manifests itself in a number of different ways,” Morrison says. “Their own track record can work against us. They might have had to sign significant noncompete agreements that create major barriers to them holding a management role at another firm.
“Age was another factor. Some other people we talked to had a similar age to myself and those of us who were already leading the firm, which meant there was no real advantage in terms of bringing them aboard in a successor capacity, since they were probably looking at retirement as well.”
Morrison never hired a third-party search firm, but he and his team did work with a consultant on an informal basis. The consultant helped Morrison refine the criteria for evaluating a leadership candidate, which ultimately led to a focus on internal candidates.
“He is a trusted industry adviser and ran one of the largest firms in the industry at one point,” Morrison says. “He helped give us the final insight regarding what he saw as the advantages and disadvantages of internal succession planning candidates versus external.
“When you add all of that up, it really did lead to the fact that we did have candidates internally who were going to be as well-qualified and well-positioned as we could have hoped for. That is what convinced me that we would be fine selecting from the people who were already managers in the organization, as opposed to people who were on the outside.”
Step into the role
The transition occurred at the end of March, but soon after Morrison and his team zeroed in on Stone as their CEO candidate of choice, they began to train him for his role. One of the chief responsibilities Stone needed to master is that of communication.
It’s perhaps the biggest difference between a leader and an assistant. The leader needs to oversee the entire organization, not just a piece of the pie. An assistant coach in football or basketball might only take charge of the offense or defense. He might manage a section of the playbook. But the head coach has to bring every player on the roster together and unite all of the players around a common set of goals.
That means the head coach, much like a CEO, has to know how to communicate effectively to a large audience.
In the six months prior to their formal appointments, Stone and Wilkerson ramped up their interaction with the entire Market Strategies workforce. It was a job with an added degree of difficulty due to the acquisitions the company had made in recent years, which meant a portion of the company’s employees weren’t originally members of the legacy company — including Stone and Wilkerson.
“That was one of the concerns for the people here who had been a part of the legacy Market Strategies for quite a while,” Stone says. “They wanted to know what this means, if anything, for our culture because the people now leading the company at an executive level are not the people who founded it and led it for the first couple decades of its existence.”
Stone’s primary location was another area of concern for employees. Stone is based in the Atlanta area and decided at the outset of the transition that he had no desire to relocate to the Detroit area. He would, instead, visit the company’s Livonia headquarters on a regular basis while primarily operating out of Atlanta.
“We had to ask ourselves if that really matters anymore,” Morrison says. “Does it really matter if all the C-level officers live in one place? We’re a smaller firm, but I had to ask myself how a Ford Motor Co. operates when their leadership is literally worldwide, with senior officers on every continent. In this day and age, if you haven’t learned to communicate worldwide, you’re in trouble from the get-go. You need to be able to effectively communicate worldwide.”
With modern communication technology, you can effectively run a business with executives, managers and employees in different locations. But it also creates an added set of challenges for someone in Stone’s position.
Most critically, if you aren’t there in person each day to promote the vision and strategy of the organization, someone else needs to be communicating in your place. Otherwise, you run the risk of complacency setting in.
It’s something that Stone has worked at tirelessly in the months since he’s taken over the CEO’s role and something that he’ll continue to work at as he fine-tunes his approach.
“That’s the danger in an internal transition, particularly if you’re running an organization with several lines of business,” Stone says. “To answer that, George and I are continually ramping up our communication, particularly to the next group of leadership candidates that we hire. We want to impart the best practices that we would hope leadership candidates would abide by. Their first priority upon accepting their new role is to get out there, talk to people, be present and available.
“It’s easy to get complacent. If you’re transitioning into a new role from another place within the organization, you can kind of become complacent yourself. You can take it for granted that people throughout the company know you, that the people on your team know you.
“That’s why, when you are assuming a new role like this, you need to put as much attention and care as is possible into reaching out to your people, getting your message into all of your various offices and locations.” <<
How to reach: Market Strategies International,
(734) 542-7600 or www.marketstrategies.com
Andy Morrison, chairman, Market Strategies International
Rob Stone, CEO, Market Strategies International
Morrison: Doctorate in mass communications research and bachelor's degree in English and journalism with a teaching certificate, University of Michigan.
Stone: Doctorate in cultural studies, Columbia University.
What is the best business lesson you’ve learned?
Morrison: Constant communication, which includes both talking and listening. Everybody emphasizes listening nowadays, but you also have to be an effective talker.
Stone: You have to be absolutely dedicated to the success of your clients and colleagues. It seems like one of the simplest lessons to learn, but it is one that is seldom learned.
What traits or skills are essential for a leader?
Morrison: You need integrity in every sense of the word. You need to be open and transparent in your communication, and deliver on the promises that you make to clients and employees. I also admire decisiveness. Make a decision and set in motion the steps you need to get to the result you want. That is something that is critical to me.
Stone: I would add that you need to convey passion for what you do. That is a big part of our job as leaders, to constantly convey the passion and excitement we feel to all of our teams.
Lay the groundwork
Step into the role
How to reach: Market Strategies International,
(734) 542-7600 or www.marketstrategies.com
The Morrison/Stone file
Andy Morrison, chairman, Market Strategies International
Rob Stone, CEO, Market Strategies International
Stone: Doctorate in cultural studies, Columbia University.
What is the best business lesson you’ve learned?
What traits or skills are essential for a leader?
One of the toughest transitions for any organization is succeeding the founders. “Founders” could mean those who started the company, those who created a visionary product, those who worked tirelessly to prove a new concept or those who gave birth to a corporate initiative that transformed the organization.
Regardless of whether it’s the entrepreneurial brains and energy behind starting a company or the creative ideas of an exceptional employee or team, making the handoff between initiator and executor is pivotal — and very difficult to do well. Just ask any venture capitalist what worries him or her the most about his or her investment. Or ask any CEO of a large company why he or she suffered through failed product introductions — or why the CEO is navigating the next program du jour.
What is it that makes the handoff so perilous?
The short answer is the relentless sense of ownership by the founder, or founders, for ensuring success and all of the behaviors that go along with that. Those who give birth to something become intertwined with its success or failure. It is part of how the founders become defined and known and they work tirelessly and do whatever it takes.
But given that the ultimate success and sustainability in nearly all cases is achieved by nonfounders who implement the ideas, strategies or organizations they inherit, how can we improve the likelihood of the baton not being dropped in the handoff? Here are some proven ways that go beyond the obvious.
Ensure that the person hired to implement has passion for the cause. Even the most talented leader can’t fake “love” — and nearly all entrepreneurs are in love with their creation and will do whatever it takes to ensure its success.
Often it is the passion and energy of the leader that infects others inside and outside the organization with excitement and motivation to go above and beyond.
Ensure the successor has the skills and credibility to lead. Would you have a smoker implement your health and wellness strategy? Would a leader who drives a large SUV be your pick to lead a “go green” initiative?
A leader may have important skills, but if he or she lacks visible loyalty to “the cause,” employees will see that and be negatively impacted. There is no substitute for the leader walking the talk when no one’s looking.
Arrange for the new leader to receive mentoring from or continued access to the founder. Boundaries on both sides need to be respected, of course, but founders can provide invaluable history and counsel. They may be the one person who truly understands what that leadership role entails and uniquely help the new leader accordingly.
Require the successor to replicate before he or she innovates. Too often there is a rush to “put my stamp on everything.” But if it wasn’t broken when you got it, don’t break it — yet. Learn quickly by replicating what worked under the founder.
Then channel the observations, learnings and new capability to leapfrog the product/organization forward — benefiting from a base of deep understanding and infusion of new insights and capabilities.
Plan for succession from the outset. The biggest test of a start-up company or a new initiative comes when the founders move on. It is really successful only when it is led/championed by those who didn’t launch it.
So, don’t treat succession like it’s the elephant in the room. Treat it as though the future depends on it.
Leslie W. Braksick, Ph.D., is co-founder of CLG Inc. and author of “Preparing CEOs for Success: What I Wish I Knew” (2010) and “Unlock Behavior, Unleash Profits” (2007). Braksick advises top executives, their leadership teams and boards of directors on issues of strategy execution, leadership effectiveness and organizational performance. She can be reached at email@example.com.
After toiling for years to build a successful enterprise, business owners have earned the right to leave on their terms and retire. However, nearly half of owners fail to achieve their timing or financial goals because they focus on day-to-day operating challenges instead of creating viable exit strategies.
“Procrastinators usually end up dying with their boots on, when they could be enjoying the fruits of their labor by planning ahead and orchestrating a seamless transition,” says Greg Chiampou, director of Business Advisory Services for Contango Capital Advisors, which operates as CB&T Wealth Management in California.
Smart Business spoke with Chiampou about the process of creating a proactive exit strategy.
When should owners initiate the planning process and who should be involved?
Ideally, owners should begin to plan five to seven years before they want to leave because it takes that long to stage for an ownership change. It also may take up to three to five years to establish a complementary estate plan. Planning ahead gives owners time to groom successors or implement structural changes that enhance a company’s value and maximize sale or transfer proceeds by reducing tax liabilities. Assemble a transition planning team that includes a certified exit planner, CPA and attorney, who may get support from an insurance adviser, business appraiser and financial planner.
Why is goal setting paramount and what should the goals address?
The owner’s goals serve as the plan’s foundation so the owner must decide when he or she wants to leave, who will take over the business and how much money he or she needs to support his or her lifestyle. Then, the planning team can flesh out the details and assess the feasibility of the owner’s objectives by using models to test the plan’s elements. For example, testing may show an owner will have to sell to a third party instead of transitioning ownership to children or employees in order to derive enough proceeds to generate an annual income of $500,000.
Who should perform the valuation and cash flow projections?
Since the business is usually the owner’s largest asset and its value is a critical element of the strategy, owners need an accurate, objective appraisal. Engaging a certified appraiser or valuation specialist doesn’t have to be expensive, and the peace of mind generally is worth the investment. Verify business and personal cash flow estimates by asking a CFP to review the accuracy of the financial assumptions.
How can business owners enhance their company’s value before a sale or transfer?
Tactics that can boost a company’s value include:
- Mitigating concentrated risk: Expose concentration risks such as a limited customer base, suppliers or products by giving owners the opportunity to secure long-term sales or supplier contracts, or increase vendors and product offerings before a sale.
- Separating assets: Strategically transfer ownership of major assets like a warehouse, office complex or franchise agreement to a separate LLC, which can boost overall value.
- Conducting audits: Identify and rectify financial discrepancies, environmental hazards or legal vulnerabilities by auditing your finances, property and legal profile.
- Documenting operating procedures and retaining critical talent: Confirm continuity with organizational charts, documented procedures and secure key players. Buyers won’t pay full price if critical operating procedures, employees and institutional know-how could depart with the owner.
- Staging: Prepare to tell prospective buyers how sales growth and earnings can be maintained and possibly expanded. Ensure your office or production facilities look like they deserve the asking price. While purchasing new equipment or furniture can boost a company’s image and value, don’t take on significant new debt ahead of a sale.
How can owners minimize the tax liabilities resulting from a sale or transfer?
Aside from the actual purchase price, taxes have the biggest impact on the proceeds from a business sale or transfer. Ask an exit adviser and CPA to review your strategy and suggest ways to reduce or eliminate capital gains and estate taxes. For instance, converting a C-corp to a S-corp can eliminate double taxation on the sale of business assets, and estate taxes can possibly be eliminated by gradually gifting shares to your children or transferring ownership to a family limited partnership or limited liability company. In fact, highly appreciated assets can be converted into a lifetime income without paying capital gains tax when the asset is sold by setting up a charitable remainder trust.
What should owners consider when developing a contingency plan?
Even the best succession plans can be thwarted by the defection of key employees or customers, the sudden death of a partner, an unanticipated cash shortage or a scion’s desire for a different career. That’s why every organization needs a contingency plan that provides solutions to game-changing problems and events. Examples include buy-sell agreements that govern should an owner die or decide to leave, employee-retention bonuses backed by insurance and a mentoring program for successors. Given these tools and a little time, a team of skilled advisers can ensure that business owners exit smoothly.
Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), which operates as CB&T Wealth Management in California. Contango is a registered investment adviser, a nonbank affiliate of California Bank & Trust and a nonbank subsidiary of Zions Bancorporation. Some representatives of CB&T Wealth Management are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango.
Investment products and services are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, California Bank & Trust, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value or amount invested.
Greg Chiampou is director of Business Advisory Services for Contango Capital Advisors. Reach him at firstname.lastname@example.org. Reach California Bank & Trust at www.calbanktrust.com.
Insights Banking & Finance is brought to you by California Bank & Trust
Succession planning may be in the back of your mind, and you may actually have a plan defined, but many business owners don’t put a lot of time into thinking about what makes the plan effective. Instead, they’re too busy focusing on the day-to-day tasks to keep operations running smoothly.
But if a company is going to survive into the next generation, it is critical for the owner to be planning how that’s going to happen, says Cheryl A. Parzych, executive vice president of wealth services, First Commonwealth Financial Corp.
“If your business is to succeed after your succession, you must consider the very fundamental questions of who and when,” Parzych says. “You must understand what has made your business success possible in the first place and assess the competencies of future owners, then develop those key players in the plan.”
Smart Business spoke with Parzych about how businesses can successfully transition by tapping talent and grooming leaders to take the organization into the future.
What do you need to ask to set the tone for a succession plan?
‘Who?’ and ‘When?’ are the core questions that set the direction for business succession plans. Who do you prefer to succeed you, and when do you see this happening?
While many owners do not formalize a succession plan, they instinctively know the answers to these questions. For example, you might say that after you die, your son or daughter will take over the business.
If you have clarity on these fundamentals, there are many specialists who can help you to design the most effective plans to execute the legal transfer. What becomes vital is whether your chosen successor is or will be capable of taking over at that time when you plan for your transition. You can bring more certainty to your plan by gaining objective insight and assessing the talent of your successor.
Then, you can move on to closing the gaps.
Why is gaining objective insight so important to the succession process?
Transitioning your business to the next leader is a very emotional step. If your business is to get what it needs to thrive, you need to identify the managerial, leadership skills and other characteristics that enabled the business to succeed in the first place.
Are you the owner of those traits? In other words, does the business succeed because of your skills and your characteristics? Or have you developed a complementary or symbiotic leadership team that can carry the company mission forward?
If you are having trouble stepping back for an objective look, advisors close to your business may prove invaluable to you at this time. They can help identify which owner characteristics drive the business and where your personal qualities might, in fact, get in the way. Also, executive coaches are well equipped to work with you to identify the natural talents you have relied on for years, perhaps, without realizing it. These characteristics and strengths will be lost during transition unless you take deliberate steps to develop key talent.
How can an owner identify key talent?
Who is your preferred successor? Assess the abilities of all prospective successors. Do the potential owners have the skills and characteristics to continue the business successfully and grow it moving forward — or are they emotional selections? At what point do these prospects fall in terms of readiness of skills and characteristics? Are there others who have been critical to your success and should play an important role in the succession plan? Don’t forget those who might have skills essential to the transition itself such as project management, communications, etc.
How should an owner develop planned successors?
It’s important to create a customized development plan for future leaders, and this is possible now that you know who you want to transfer the business to and the current competencies of the successor and important team members. Focus on talent development and make it one of your top-three business priorities. In fact, your business cannot have a successful year if it fails in talent development. To create and execute effective talent development plans, you may need to engage specialist resources to help you while you remain the visionary and executive sponsor.
How does an owner know if the talent will be ready to take over when he or she wants to transition the business?
Though parents hoping to hand off to their own children often have a hard time with this, you may objectively find that your future owner is already close to or ready for succession. Continue to engage your ready successor and position him or her for the coming transition, as this will encourage acceptance by employees, customers, vendors and advisors.
You also have to honestly acknowledge if your intended future owner is not ready or if he or she lacks the core leadership and/or interest to carry the business forward. If this is the case, again, your advisors can lend support. Open discussions with advisors can help identify and plan for realistic alternatives. Advisors can also support difficult conversations with concerned family members and employees.
Give your successor the opportunity to succeed. Tune in to his or her talent, skills and characteristics, and watch how that person interacts with employees, advisors and other stakeholders. It’s a critical mistake to allow a budding future leader of the business to go unnoticed. Seek guidance as needed. Commit to talent development and customize a succession plan with your advisor, who will hold you accountable and help you synchronize talent development with your transition timetable. This will make your succession plan viable and bring you great peace of mind so that you can enjoy the process and look forward to the next chapter in your life.
Cheryl Parzych is executive vice president of wealth services at First Commonwealth Financial Corp. Reach her at (724) 778-3973 or email@example.com.
Insights Wealth Management is brought to you by First Commonwealth Bank
For those of you diligent baby boomers who have filed your income tax returns on time, you can redirect your attention to your readiness for eventual retirement. Yes, on Jan. 1, 2011, the very first baby boomers turned age 65. For almost the next 20 years, more than 10,000 baby boomers will be considering retirement or retiring every single day. But just because you’re eligible does not make you necessarily prepared to enter this new phase of your life.
Today, let’s address some challenges to retirement cash flow. What amount of income do you really need in your golden years? What will be your expenses? Traditionally, previous retirees looked forward to living on the certainty of a fixed income and fewer expenses in the retirement years.
The first thing to do is some homework. Create a current personal income and expense sheet. Uncover what you are spending today and every day. Once that is completed, consider the potential financial obligations that you will face in the future once you retire and are without an employment income. The foundation for a solid retirement plan is built on managing your expectations and life-plan goals relative to your income sources, assets, liabilities and your overall net worth. Let’s explore some what-ifs that may impact you.
Writers have stated that boomers consider retirement as a time to reinvent themselves. The economic and financial events since 2007 have taken that reinvention definition to a new level. Let us be reminded that we boomers are still considered the “sandwich generation.” We still have an obligation to our children and heirs, but we also have the eventuality of dealing with aging parents and other relatives.
How are you preparing for these phenomena?
- When will you really retire? The economic downturn includes the virtual disappearance of any “standard” retirement age. According to a recent report from the C.D. Howe Institute the new trend among baby boomers is to prolong retirement by at least five years because of economic and social pressures.
- Employers are bracing for major changes in health care policy come 2014, and for better or worse, you’ll be affected. If you or your dependents have health issues, update your financial contingency plan around potentially higher costs for care.
- Are you taking advantage of voluntary benefits? Voluntary benefits, which can include additional disability coverage, long-term care insurance and/or life insurance, are worth revisiting at different stages in your life.
How are college and/or post-grad education expenses impacting your future cash flow?
- Americans now owe more than $875 billion on student loans, which is more than the total amount owed on their credit cards.
- Since 1982, the cost of medical care in the U.S. has gone up more than 200 percent, but that is nothing compared to the cost of tuition, which has gone up by more than 400 percent.
- Approximately two-thirds of all college students graduate with student loans. Student loan money is out there; however, high school students are never told that not even bankruptcy can get you out of student loan debt. It stays with you forever until it is paid in full.
So, what if you have co-signed and/or guaranteed those college loans or you have taken on other debt to help your children’s education? How will that impact your cash flow during your retirement years? What if your children become dependent for an extended period of time?
Parents’ and children’s delayed creation of a strategic and tactical strategy to deal with educational costs has created this huge burden on the graduate and the parents/custodians. The unfortunate result of this educational quandary is financial distress because not all college graduates are guaranteed a well-paying career to offset the costs of the financial debt incurred to achieve their diploma. In addition, many of those children don’t launch into independence but return home once again as a dependent. These children are lovingly referred to as “boomerangers.” (By dissecting the word, you may also interpret that child(ren)’s return home has changed boomer’s frustration to boomer’s anger).
If you are a business owner, have you really addressed the issue of a successful continuation and succession plan? In theory, business succession planning focuses on contracts, numbers and documents. Taking the “you” out of the equation is a critical factor in business succession planning. What can you do to plan the best success for your own financial future, the business and potential inheritors?
Start by securing the services of a credible and unbiased business valuator, and understand clearly the basis for the valuation. Not only will accurate business valuations allow you to strategize your income potential, it will also provide the buyer with financial metrics to accurately price the current market value of the enterprise. The business valuation should also address the disposition of and/or the impact of existing liabilities on the future business performance and on your cash flow from the sale of the entity.
Focus on the business players. “It’s not personal, it’s business” is relevant in succession planning, too. Put aside personal feelings and expectations about tradition and keep succession planning about finances and business. Identify family members’ interest in being involved in the future business and accordingly incorporate their roles (or their lack of them) in the succession plan.
Recognize how much of your personal worth is the business. Work with your financial advisor and estate planner now to determine strategies that can strategically integrate your business plan into your personal financial plan and retirement income scenario.
As a fee-only wealth manager and life-planning company, we are ready to make your retirement reinvention a success.
Robert A. Valente, CFP®, AEP®, is CEO and Managing Member of RAV Financial Services LLC. He can be reached at firstname.lastname@example.org.
Pat Whitaker was ready to step away from the day-to-day responsibilities of running Arcturis. But she wasn’t prepared just yet to give it all up and call it a career.
With that thought in mind, Whitaker did some research and found that with a lot of workspace design firms, there was no succession plan in place to ensure a smooth transition from one leader to the next.
“One thing I didn’t want to do was sell my company to an outside source,” says Whitaker, founder and CEO at the 50-employee company. “I wanted the people here to own it.”
In order to make that happen, Whitaker needed to find someone who she would feel comfortable with as the new leader. She wasn’t looking for a clone of herself, but she did want to find someone who shared her values.
“They can have a little bit of a different strategy about how to get there,” Whitaker says. “But if their basic values and basic vision is drastically different, it’s probably not going to work.”
Whitaker began the process by asking employees to step forward who had an interest in taking over as company president. She then asked them to write an essay.
“I asked them to write a description of why they thought they should have the job, and they all did that,” Whitaker says. “One person thought he was entitled to the job because he had been here a long time. Another person thought he should have it because of his marketing skills. And the third person, she wanted to make a really good contribution to the firm and the future. She was much more visionary.”
It was what Whitaker was looking for. You need people who care more about the big picture than their own needs or their own skill set to serve as leaders in your organization.
“It’s got to be somebody who is a strategic thinker as well as a tactical thinker,” Whitaker says. “Lots of people think they are strategic thinkers and they are not. So that perception kind of came out.”
Whitaker composed a job description for company president and began to dig deeper into what each person brought to the table to see where there were matches.
“You have to develop a job description so that even though they see what you do, they kind of know what’s involved in the job,” Whitaker says. “Then you have to ask them. I spent time with them. I don’t know that I exactly interviewed them, but I did ask them why they wanted the job and I sort of vetted them that way. It’s not like I didn’t know them. I knew all these people pretty well.”
But her own intuition couldn’t be the sole basis of her decision. In any personnel choice as important as that, Whitaker says you’ve got to do psychological testing.
“If I look back three years ago, a person who I thought was going to be really good in that role was absolutely the wrong person,” Whitaker says. “After the testing was done, I could see those traits in the person. They were really good at one thing, but they weren’t the right kind of person to lead the firm.”
If you haven’t used psychological testing before to help with personnel decisions, Whitaker says it’s a good tool to test leadership skills.
“Part of it is an intelligence test,” Whitaker says. “Will people follow you or not? What kind of marketing experience do you have? How dedicated are you?”
Whitaker did not want an important matter such as this to be decided in a rush. It helped that she wasn’t in a hurry to leave the company and wasn’t even going to leave completely once a successor had been chosen.
In the end, the methodical approach brought Whitaker to the right successor. Traci O’Bryan was named president in July 2010. And while it hasn’t been easy, Whitaker has learned to let O’Bryan find her own way was as a leader.
“You just have to keep your mouth shut,” Whitaker says. “Just because it’s different than the way I would handle it, that doesn’t mean it’s wrong.”
How to reach: Arcturis, (314) 206-7100 or www.arcturis.com
Know your place
Pat Whitaker lets Traci O’Bryan come to her if she has a question about something that needs to be addressed at Arcturis.
“If she needs advice from me, I give it to her,” says Whitaker, founder and CEO at the 50-employee design firm. “But she makes the decisions. At first, she didn’t really make them too often. But after a couple months, she started doing it.”
Whitaker says O’Bryan still reports to her, but it’s O’Bryan’s company to lead and manage.
“She’s running all that stuff and I’m coaching her and working with her and doing marketing to try to get the firm work,” Whitaker says.
There are still times, however, when Whitaker misses being on top.
“If there’s a meeting that I usually go to, I tell them, ‘Oh, I don’t really need to go to that meeting,’” Whitaker says. “And then I say, ‘Oh, you didn’t invite me to that meeting.’ You want both things that are in conflict with each other. But I’m getting used to it now. It’s been over a year, and it’s getting better.”
When family business owners prepare for the next generation to enter into the business, most families initiate discussion of the succession process.
However, for unrelated business partners, this can be an entirely different situation, says Ricci M. Victorio, CSP®, managing partner at Mosaic Family Business Center.
“You need to talk, before it’s time to retire, about how the business is going to continue with or without your presence,” says Victorio. “No matter how young, healthy or determined you are to stay at the helm, if your sudden departure would be devastating to the business, you need a contingency succession plan. And ‘devastating’ is not a word you want as part of your strategic plan.”
Smart Business spoke with Victorio about how to ensure that your business will continue to thrive and grow.
How does succession in professional firms differ from that in family-owned businesses?
In a family business, parents will introduce their children into the business at a fairly early stage in their professional careers. Throughout their maturation, if all is going well, employees, clients and vendors become familiar with the next generation, understanding that at some point in time, there will be a transfer of control and eventually ownership. A parent can start transferring stock to a child or a family trust over many years. It can be purchased out of bonuses, gifted or inherited.
In a professional firm, however, the succession challenge is in buying out retiring partners who are still earning full salaries and stock payouts. Gifting or inheriting is certainly never an option in nonrelated stock transfers.
How do you create a profitable environment to allow younger partners to be able to buy the stock in a shorter period of time when all of the cash is going out to the senior partners?
Founding partners tend to have the most significant clients, and passing them on to junior partners is a complicated process in retaining client confidence and to the firm as it relates to who receives the lion’s share of the billing credit and income.
How can you begin to create a pathway to develop future partners and help them learn to market the firm?
Though the younger associates may have been working under the lead professional handling the task management of serving clients, they probably haven’t learned to market and perform business development. Partners are concerned that new clients may not emerge if they retire, thus creating a potential revenue impact on the firm and in their buyout price. A typical question asked is, ‘If we stop working, who will bring in new clients?’
Business succession is not unlike family succession. Here are some helpful tips to consider:
? As a senior partner, you need to groom younger people by creating opportunities for clients to work with you and your protégé.
? Mentor the younger person by giving him or her more responsibility and allow the client to interact with that person.
? Tell clients that you work in teams because you want to always have someone who understands the project, even if you are unavailable. This is a key point and one that is often overlooked.
? Appoint a young, talented potential successor as the client’s primary contact but continue to work as a team.
? Succession is occurring on multiple levels, including in your clients’ business, so it is important to match younger people with like-minded clients. This will aid professional firms in keeping long-term clients as the business goes through succession.
How can a senior leader transition to a new role before retirement?
This is a delicate conversation because you’re talking about affecting the financial stability of high-powered professionals who wish to maintain their income. You want to increase productivity and profit by using the founders’ expertise and connections to bring in new clients. Founders can explain to clients they are still involved from a strategic or global viewpoint and introduce highly capable, qualified younger associates to handle the actual casework, which will build confidence and new relationships.
As a result, profits and stock value improve, and salaries can be increased for new and existing staff. It is critical that new staff understand that they are progressing and have potential for growth, or they will move on to another firm where those opportunities are present.
You also need to redefine the roles and responsibilities of the senior members. This discussion can be more easily accomplished (and without the drama) through the facilitation of an experienced succession coach. Salaries can be realigned for fewer hours, providing revenue to pay the next tier of partners. You retain the skills of senior members while creating a circle that continues to build success.
Succession planning must be a fundamental element in every business’s strategic plan, even if you’re not looking to transition in the near future. It is always important to be prepared for a change within your business and provide a smooth transition for the clients; because, leadership change can occur without warning.
Ricci M. Victorio, CSP, is managing partner at Mosaic Family Business Center. Reach her at (415) 788-1952.
Insights Wealth Management & Family Business Consulting is brought to you by Mosaic Financial Partners
No business owner wants to think about what would happen to the business if circumstances prevented him or her from running the company. Confident, hard-driving owners have a vision for the future, and accidental death, terminal illness or disability are generally not in the picture, says Howard N. Greenberg, a managing member at Semanoff Ormsby Greenberg & Torchia, LLC.
“To succeed in business, principals often have a belief of their own invincibility. But if there is no emergency plan in place and the principal dies or is disabled, the results can be catastrophic. If suddenly the ship is rudderless, like any ship without a captain, it will crash,” he says.
If your company doesn’t have an emergency plan in place, now is the time to develop one.
“It’s always the right time to develop such a plan,” says Greenberg. “In doing so, you will gain useful insights into your business as you examine your management team and put together a group of outside advisers.”
Smart Business spoke with Greenberg about how to develop an emergency plan for when the principal can no longer lead the organization.
What key components should an emergency plan include to ensure a smooth transition of leadership?
An emergency plan involves identifying a group of successor managers, determining what role each key manager should play in the business and then putting in place incentives to ensure that they stay on board. Additionally, the principal must assemble a team of outside advisers, which would include an attorney, accountant, close experienced business associates, a spouse or other family member, and possibly a trusted and experienced friend. The outside board will ensure that the emergency plan is properly executed by the successor managers.
What considerations should a principal evaluate during this process?
The principal must determine how vulnerable the business would be if he or she were not in the picture. Who would step up and take over as head of sales, manufacturing, finance, or the other key functions? Who on the leadership team would drive the business forward toward predetermined set goals? And, critically important, what are the ultimate goals for the business? Is it to be sold? To be liquidated? To be sold to the inside management team? Will the business need to attract outside investors so the organization can function as it was before the principal was gone?
These what-if scenarios need to be worked out by the principal, then discussed and strategized with a team of outside advisers.
How does the principal begin assembling a next-generation management team?
The first step is to identify a team of leaders that will replace the principal, slotting managers in key positions such as sales, operations and finance. It’s critical to groom this team before an emergency occurs so the principal can determine who will fill his or her shoes. Outside advisers can provide insight on future leaders and offer perspective on what roles will be critical to carrying the business forward according to its strategic plan.
When you are ready to present the plan to your managers, be sure to consider who the No. 1 leader will be and consider reviewing the emergency plan with that person before unveiling it to the team.
What if the sales director you plan to push into the role of president says he cannot possibly work with the operations leader you want to choose? You need to be aware of internal politics so you can tweak your plan as necessary.
How does a principal motivate and reward leaders so they stay on board?
How valuable is a team of leaders if they jump overboard once the principal is gone? They’re not. You need them to stay. An owner can choose and groom his or her successors, but if they leave the company, then that effort has been a waste.
Principals must put in place incentives to motivate both inside leaders and outside advisers to stay on task. A priority is determining how to compensate the internal managers.
Incentives can include salary hikes or performance-based bonuses, generally tied to a commitment to stay during a transition in leadership. Or, a company can be recapitalized so the new leaders can be rewarded with certain stock or stock rights and thereby obtain equity in the company. Inventive stock options, phantom stock plans and stock appreciation rights are useful tools.
Also important is a commitment to the key managers of continued employment so they are assured that they can stay on board during a transition and participate in the good they have done for the company. All of these tools incentivize managers who are being groomed for leadership roles.
What important role do outside directors play in executing the plan?
The plan should be coordinated among the principal and the outside advisers, including an accountant and attorney, who can provide direction from a business and estate planning perspective. Outside directors should meet at least quarterly to review what is going on in the business, and to ensure that the goals that have been set are appropriate, realistic and are being achieved. Outside directors are critical because, in the event of a principal’s unexpected exit from the business, they must provide direction to the internal managers and ensure that the principal’s emergency plan is executed.
None of us can control sickness, accident or death. And unfortunately, many of us do not plan for these life events. Our businesses can suffer as a result.
Creating an emergency plan is not a task to leave until tomorrow. The process should be initiated now. You never know what can happen in life.
Howard N. Greenberg is a managing member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 or email@example.com.