Business owners procrastinate when it comes to succession planning for many reasons, including uncertainty over potential successors and concerns about how affected family members and key employees will react. But these obstacles aren’t insurmountable, according to Lawrence Gold, corporate attorney for law firm Carlton Fields and author of Passing the Torch Without Getting Scorched: Preserving Your Legacy With Smart Succession Planning.
Staff Writer Angela Poulson spoke with Gold about common obstacles business owners face in creating and announcing succession plans and his approach for overcoming them.
MDM: You say in the book that ownership succession and management succession are very different concepts and shouldn’t be lumped together. Why?
Lawrence Gold: A business owner can say they want their kids to own the business or their wife or whoever, but that’s a far cry from them being able to run the business. By the same token, they may have a lot of confidence in a national sales manager or a head of production and want them to have a stake, but they may want ownership to stay in the family. There are different constructs and different sets of criteria that go into both sides.
MDM: What are some of most important things business owners should keep in mind when they begin to plan for their succession?
Gold: First, I think the owner has to be willing to deal with the issue of giving up control of his or her business at some point. You’d be surprised how many owners aren’t willing to deal with it in their wills or as part of their estate plan, and they figure somebody else will worry about it when they are gone. But that’s really a very simplistic and naive way of looking at it. It’s very important to face the reality of actually giving up control of your business, and for many business owners that is a very difficult hurdle to jump.
Another thing to keep in mind is that once you start the process, you need to commit to finish it. One of the worst things a business owner can do is to start a succession planning process and then abandon it. That makes it tough for everybody – key employees, family, everyone.
A third important thing to keep in mind is that when you do it, recognize that it is not a fixed and static document. It is a dynamic, evolving thing, so it needs constant monitoring and review. Circumstances may change. For example, the son or daughter you thought was going to take over the business and carry on your legacy all of a sudden goes in a very different direction, and so the owner has to rethink what they’re going to do. It’s not something you can do once and forget about.
The other way to think about it is if the owner builds in a methodology that allows for changes, such as starting off the transfer of equity in installments, the owner gives himself or herself the opportunity to change. They could decide at some point to turn it all over at once, or conversely, if it’s not working out, they can stop the transfer process there.
MDM: You said owners often have a hard time giving up control. How have you seen this difficulty come up in succession planning?
Gold: A very close friend and client of mine is at the age and stage of his life where he wants to give up control, so he and I have negotiated deals with three separate individuals to come into the business, acquire a minority stake and ultimately acquire a majority. Not a single one of those arrangements worked, because at the end of the day the owner simply wasn’t ready to give up control and kept the minority partner from acquiring enough authority to begin making decisions.
But you’ve got to let them do that. They may make mistakes. They may not do things the same way the owner does. And no one’s going to have that same degree of expertise or experience as the owner. But they’re going to look at the business with fresh eyes, and that’s something every business owner should want to see happen.
The business owner has to cross an emotional barrier, not just a legal or professional barrier. They need to get to the point where they can say, “I’m going to let other people make these decisions, and I’m not going to second-guess them.” Some consequences may be good, others bad, but you’ve got to let them do it, because that’s the only way they’re going to learn about the business and carry it to greater success.
In some cases, the owner may feel there is a kind of golden handcuff situation where they’ve given the person 10 percent of the company and they think they’ll never leave, but many of them do leave. Why? Because there’s not enough equity in the world to make up for the level of authority and responsibility that good young leaders want.
MDM: What are some of the common pitfalls you’ve seen owners make when considering family members for future ownership or management?
Gold: When an owner has multiple children and has to decide which of those will run the business, they get in a real dilemma, because they don’t want to alienate one child versus another. Time and time again, I’ve seen owners leave this, in effect, to their estate planning, and they’ll say that under the will, Bill and Sally each get 50 percent of the company. So the founder dies and Bill and Sally each get 50 percent, and guess what? Bill and Sally fight like cats and dogs, but they both own 50 percent, so the company begins to dwindle and dissipate because they can’t come to an agreement.
The owner has to designate one or more children who will truly run the business. Oftentimes, if they can’t make a decision between Bill and Sally and don’t want them fighting, they’ll sell the business. So that’s one answer. It’s not a bad answer, but you’re depriving your kids of the ability, the right to take the success that you’ve built up and grow it.
This is as much a matter of family dynamics as it is succession planning, and this is certainly a situation where one size does not fit all, because each family dynamic and circumstance is unique.
MDM: Why is it important to get a business valuation as part of the planning process?
Gold: When an owner decides to sell his business (assuming it’s not a publicly traded company) and he talks to his advisors about how much they think the business is worth, he’ll get all kinds of armchair opinions. Rarely does an owner ever go to the trouble of getting a formal valuation, but when you’re dealing with succession planning you have to, because first of all, the owner needs that to gauge how much of that equity or value he or she is willing to dispose of or distribute now or at some point in the future.
You also have to have a basic benchmark valuation of the company from which to measure all of the other transactions that are going to take place during estate planning, whether you create a family limited partnership or trusts, or other ways of minimizing the owner’s estate tax liability.
It’s also important for setting expectations. Imagine the owner goes to his top three employees, and he says: “You’re going to each have the opportunity to buy or earn 10 percent of the company, and we’ll structure it in a way so that when there’s a liquidity event, a sale of the company or a public offering, that’s when you’re going to realize the benefit of this equity that you own.” And they may say: “Great, what’s it worth right now?” The owner may have to say he doesn’t know. That’s not a very good answer.
Or he may say he thinks it’s worth $25 million dollars, and they may be very happy with that, but what if it’s worth $50 million or, worst case, $10 million? Many, many times, owners have very high and unrealistic expectations of what they can get for their companies.
MDM: Owners often put off announcing succession plans because they’re afraid it might alienate family members or key employees. Isn’t that a valid reason for putting it off?
Gold: The longer the owner waits, the worse it’s going to get. I have found two things about that in my experience. No. 1, if you’ve got a key employee who’s going to leave because he isn’t the anointed one, you probably don’t want him or her anyway. No. 2, if it’s a family person, you’re better off knowing now rather than five years from now if your child is really interested in doing this or not.
If you have these conversations, and you’re transparent with your family and key employees, it usually resolves itself into a situation where you’ve built up more team spirit and a more cohesive unit among your management people and a better understanding among your family members.
MDM: Where should business owners start?
Gold: In my book, there is a questionnaire that helps walk business owners through the initial stages of succession planning. That aside, business owners should talk to their trusted advisors and get input from them. They may have a friend or a colleague who recently went through this who they can talk to.
Owners over time build up expertise in decisions like whether to go into a new market or to change a product line. But the difficult thing about succession planning is that this is a unique situation that hasn’t been tackled before, so they need to talk to someone who’s been down that road.
This is a gut-wrenching decision-making process at its very core. You’re asking, “What’s going to happen after I’m gone?” No one likes to think about that. But a good business owner does think about it, and treats it like any other major business decision.