Two Succession Planning Scenarios: Family or Key Managers

By Ricci M. Victorio, MA and Vistage speaker Hugh Roberts

Succession¹ planning requires far more than creating and addressing your wills, trusts and buy/sell agreements. It is a process that requires significant planning of leadership, operations, human assets, family matters, and more. The four most important factors that position your business for successful succession are:

Developing leadership and management bench strength
Creating a three to five-year strategic plan focused on improving profits and growing your business
Identifying and locking in key managers who are instrumental to your business’ success
Addressing the sometimes difficult family or partner emotional issues that inhibit business performance

As you consider your options for the succession of your business—whether passing it to family, key managers, or selling to a third party—it is important to understand that one size does not fit all. Every business environment is unique in its people, complexities and industry demands. Succession can be planned in many ways, and this article offers a plan of action for two common scenarios: Passing a business to a family member, or retiring and having managers run the business in your absence.

Scenario 1 – Passing the business on to a family member
You are the owner of a second-generation business with several family members working at various levels of experience, competency and commitment. You have a core group of long-standing, trusted, key managers who have helped build and sustain your success. The business has relatively low turnover and high customer-satisfaction ratings, and you are currently making the money you need to feel comfortable. You are ready to retire from day-to-day operations, and you want to ensure the future viability and success of your family’s business. In this scenario, the most important aspects of your plan are to:

Develop and communicate your strategy. Develop an exit strategy, and then communicate the details to the appropriate managers. They need to know their role and importance in your business succession vision.

Create bench strength. Develop a process to integrate family members within your management team without disrupting current operational performance. Partner with key management to develop education, experience and training requirements for advancement within your company. Create bench strength by engaging key managers in mentoring activities with family members and upcoming talent.

Define expectations. Preclude family disagreements by clearly defining expectations about employment criteria, proper attitudes/behaviors, required training and experience for available positions. Use a facilitator or moderator to formally discuss agreements and solve problems.

Distribute your estate equitably, not equally. Think about distributing assets that are meaningful and equitable in worth, rather than letter-of-the-law equal. Stock in a business that is subject to risk is not as valuable to an uninvolved child who may prefer more stable assets. Communicate your planning and reasoning with all appropriate family members. It is better for them to hear this from you, rather than from an attorney at the reading of the will. Remember, surprise can destroy family harmony.

Scenario 2 – Having your managers run the business until a successor is found
You have built a profitable business from the ground up, and you’re looking to retire gradually during the next five years. You currently have no family members who are interested in, capable of, or available to take the helm. You do, however, have trusted, talented key managers who could run the business in your absence, but you’re not sure they will continue to pay close attention to the key drivers fundamental to business success. Additionally, the loss of one of these managers could severely impact your business and ability to retire. You’ve come up with a plan: Step away from the company and have key managers run it while leaving open the possibility of a third-party sale or future family member transfer.

This approach is known as a “Key Manager Succession BridgeSM” and is used when there is no qualified successor. The key managers bridge the leadership gap until a successor is ready to take over the business. This approach financially motivates the managers to commit to the business until a successor is found. Depending on the leadership skills and capabilities of the key manager, they may be sold stock to become the successor. A succession bridge allows a business owner to step away from the company with confidence that it will remain both viable and available for a sale or transfer.

To lock in and motivate key managers to a succession bridge plan, consider these strategies:

1) Reward accountability, teamwork and profitability. Despite your knock-out product, service, or business location, the main ingredients that have made you successful are the people in your organization. To continue the success of your organization, inspire and incentivize your management team to be committed to the business. Here are some recommendations:

Develop a Management Advisory Board (MAB) with key managers who will engage in problem solving outside of their specific departments, working together to provide oversight for the entire business.
Develop a five-year strategic plan with the members of the MAB and shareholders.
Create ownership and management agreements that clearly state expectations, define responsibilities, and confirm core and strategic business values.
Provide financial incentives that are tied to profitability, business performance and customer satisfaction.

2) Promote corporate longevity. Motivate key managers to work together and remain loyal to your company once you’re gone by tying them to upward profitability with a 10 to 15-year vesting plan. This plan should be tiered with defined profitability thresholds that begin at a level to encourage key managers to stretch beyond historical standards, work together as a team, and grow the company according to your strategic vision.

If your goal is to step out of day-to-day operations, it is imperative to assemble a leadership team that can sustain productivity and drive profits without you there. While a key manager or a MAB is an alternative to an outright sale, they also boost the value of the business to a third-party buyer who will see that the business can continue to operate and grow without your presence.

Perpetuating your business through the next generation while positively impacting your employees is easier said than done. It can be a daunting task. To stay the course, start with a strong vision, an open mind and patience, then commit to a plan.

Ricci M. Victorio and Hugh B. Roberts are Partner Directors of The Rawls Group, a highly specialized business succession planning firm with offices across the country. Ms. Victorio and Mr. Roberts have been providing succession planning leadership to family-owned businesses with their fellow associates at The Rawls Group since 1973.

¹I often hear people use two words interchangeably: secession and succession. For clarification purposes secession means the act of withdrawing from an organization or political entity, usually because of issue differences, while succession means the coming of one person after another in order, or the transmission of property by inheritance or will.