Industry Viewpoint: Having the Hard Conversations

Succession planning can be hard, uncomfortable and awkward. I have been through the succession planning process personally and have advised others as they navigated ownership transitions. Every situation is unique, and there is no one-size-fits-all approach.

While I have a background in finance and accounting, I am not a tax expert, estate planning attorney or licensed CPA. Whatever path is chosen, it is critical to consult with qualified professionals. Here are four key steps I would recommend.

1. Determine the Value of the Business

Everyone involved should understand the value of the business. If the company were sold to an outside third party today, what would it be worth? This valuation should include the business, real estate, other assets and any shareholder benefits or perks. Most importantly, all current and future shareholders should agree on either the value itself or the formula that will be used to determine value.

2. Align Shareholder Expectations

One of the most overlooked areas of succession planning is understanding what all parties expect before and after the ownership transition. In many cases, outgoing shareholders expect certain benefits to continue even after they are no longer actively involved in the business.

Examples may include health insurance, cell phones or a vehicle allowance. There is no right answer regarding these benefits. The important thing is that expectations are openly discussed and factored into the financial structure of the transition.

3. Assess Future Shareholders Honestly

This is often the most difficult conversation. Owning a company and running a company are two very different responsibilities. Future shareholders should receive an honest assessment of their readiness, capabilities and leadership potential. Sometimes the next generation is fully prepared to lead. In other situations, they may never be the best choice to run the business. While these conversations can feel personal, avoiding them can jeopardize the future of the company. The transfer of ownership and the transfer of leadership do not always have to go to the same person. Family members may retain ownership while an experienced outside executive manages the day-to-day operations.

4. Address Other Family Members Early

This can be the most awkward conversation of all, but it may also be the most important. A common scenario occurs when incoming shareholders purchase the business at fair market value from the outgoing shareholders. Later, when the owners pass away, the children who acquired the business are excluded from inheriting additional assets because they already received the company.

While the logic may seem reasonable on the surface, it can create significant inequities. The incoming shareholders have paid for their ownership interest, often over many years and with considerable financial risk. Excluding them from future inheritance can effectively result in them paying for the business while other family members receive assets through the estate without making the same investment.

Final Thoughts

A successful succession plan is about much more than transferring shares. It requires honest conversations about value, expectations, capabilities, leadership and family dynamics. The earlier these discussions begin, the more options everyone will have. Delaying the conversation rarely makes it easier. My succession plan was very successful, but it only took 24 years to complete.