Succession Planning: Begin With the End in Mind

It is never too soon to consider an exit strategy from your business.
Each business has its own unique circumstances that will need to be considered when choosing the transition methodology.
By Craig Boyce, Jun 22, 2017

It is never too soon to consider an exit strategy from your business.

Depending upon the industry in which your business operates, there will be multiple exit options to consider. During my 35 year career in public accounting I have had the unique opportunity to work with hundreds of privately held businesses. I have observed that businesses which have a viable plan of ownership succession in place not only provide an exit plan for owners, but often perform at a higher level than many of their competitors. A well-conceived and thoughtfully implemented plan will provide a path for owners to retire on their own terms and at their own pace. Such a plan can be far less disruptive to a business and its employees and more protective of company culture than a sale to a third party.

It is important to work closely with experienced professionals to select the right mechanism to facilitate ownership transition. Each business has its own unique circumstances that will need to be considered when choosing the transition methodology. Selecting the right vehicle will help maximize the monetary benefit to both sellers and buyers as well as mitigate the tax impact.

While the above mentioned reasons alone may provide sufficient incentive for owners to consider creating a succession plan, they may not be the most important reasons to do so. A well-managed succession plan will incentivize key employees to perform at a higher level and will create a culture of teamwork and cooperation throughout the management team. It will help the company attract and retain highly motivated and capable employees. In many cases, participants in the plan will become enthusiastic ambassadors for the company and will reach out and recruit new talent. In a market short on capable people, a well-conceived succession plan will help your company stand out.  All of this will lead to organic growth, better margins and greater corporate stock value.

In talking with business owners about succession planning, I have found that most are interested, but lack the guidance to proceed. Many owners are unsure how to approach their management team and are not even certain they have the qualified individual or individuals within their current management team to begin the process. It is critical that owners properly vet prospective owners within their management team for compatibility with other owners, fiscal responsibility, creditworthiness, risk tolerance and ability to function as a part of an ownership group.

Before committing to a specific ownership transition vehicle and incurring legal costs for operating agreements and plan documents, I have found that a good intermediate step is to create a non-qualified deferred compensation plan. Such a plan would include all prospective owners within the management group, as well as other key employees, who because of various other reasons, may not be motivated by ownership. A non-qualified deferred compensation plan with rolling vesting funded by a specific percentage of the company’s annual net income will be motivational to all participants and help foster a cohesive focus on building net income. The plan will help owners determine who among the management team best qualify for ownership and are desirous to obtain ownership. The plan will also provide capital for those selected for ownership as well as “golden handcuffs” for other participants, who because of risk tolerance, compatibility or other reasons, do not enter the ownership group. This type of plan will also be an effective tool in luring other talented people to the company.

When owners begin with the end in mind and carefully incorporate a well-crafted incentive compensation and succession plan into their overall comprehensive business plan, smooth ownership transition and business continuity will be more easily achieved. More importantly, your business will have a better chance to become best-in-class as top, talented people push the company forward and eventually push you out on your schedule and on your terms.  

This article is intended for educational purposes only and is not a substitute for obtaining competent accounting, tax, legal, or financial advice from a certified public accountant, attorney, or other business advisors.  You should not act upon any of the information in this article without first seeking qualified professional guidance from your business advisors on your specific circumstances. The information presented should not be construed as advice or guidance from BFBA.