A Starting Point – Part 1 of 3
It is a fact of life that every business owner must exit their business eventually, whether in retirement or on death.
Some people plan their exit for years in advance. Others do not. While even the best laid plans can go awry, it is often the businesses without any plans that suffer the most, leaving families, co-owners, and employees scrambling to cobble together a way forward.
Why do some people avoid the inevitable? Is there anything advisors can do to help them?
This is the first in a three-part series creating a baseline for succession planning discussions (see Business Succession Planning – Basic Principles and Putting the Pieces Together for parts 2 and 3 of the series). The goal is to give advisors a common framework and reference point for these discussions, so we can all better help individual business owners build their comprehensive succession plans.
Advisors – including lawyers, accountants, and insurance professionals – are trained to know the options available and are best positioned to help their clients evaluate the tax, legal and financial considerations of succession planning. But the advice on how to execute a succession plan assumes the business owner has already bought into the need for a plan itself. At the start of the process, owners can be unsure, confused, or even skeptical about the need to plan at all – and this sometimes derails the process altogether, or significantly delays it to the point where options become limited. How can advisors help bring clients to a point of comfort and acceptance, regarding the decisions at hand so that the parties can use the tools available to properly implement their ideas?
At its heart, succession planning is really about a business owner planning for a future where they are no longer involved in the business. To advisors in this field, this seems obvious, banal even. But to a business owner, it can feel like it is about planning to give up their function or even their purpose in life. It is critical for advisors to understand the emotional implications of this process and to work together, and with clients, to manage and build room for these implications in the plan.
Succession Planning – The Background
People start businesses for varied reasons, some out of necessity and some out of desire (or a combination of the two). Their experiences and personalities shape how they view themselves and their roles within the business. Some owners have an easier time than others seeing a future for their business without themselves. As a starting point, an advisor assisting an owner to plan for their future should understand how their client views themselves and views their business, and how difficult it will be for the owner to untangle that relationship on exit.
Succession planning is as much about the emotional process of changing hands as it is about the legal and financial implications. The options depend very much on what the individual business owner wants and hopes to accomplish. And this, in turn, depends on their family and friend life, and how they envision the next phase – but most importantly, it turns on the business owner being able to envision a next phase at all.
To truly plan for succession means a business owner needs to be able to look past their business and see what they want for themselves. This may be out of the purview of some advisors to assist with. Lawyers, for starters, are not trained in counseling people on their goals and desires. Clients would rightly be upset if they are paying for legal advice and their lawyer starts therapizing instead. But advisors, including lawyers, can recognize when this might be a stumbling block for an owner and tailor advice accordingly.
For owners who cannot see the business without themselves in it, it is sometimes necessary to re-focus the conversation. Instead of trying to force these owners to choose a defined and overarching path, whether a sale or a fixed transition plan, it might be easiest to start with only the crucial planning decisions. There are certain basic decisions that must be made: who will act on the owner's behalf if he or she is incapacitated, who will organize the owner's affairs when he or she passes away. The owner will have to decide how to allocate his or her resources after death. For an owner struggling with the idea of giving up control, even these decisions will be difficult. Recognizing that difficulty and working with it is key. Perhaps this is a person who wants to avoid making these decisions and will require regular follow-up to ensure they get the basics in place. Perhaps they need an anchor to get started – a plan put forward by an advisor that they can tweak.
Eventually, succession planning should move beyond these basics. It is about deciding how to transition the business, and what that transition is aiming for. A business owner struggling with the idea of giving up their place in the business will not be able to see the goal of the transition – even if the basic planning steps above are covered, they may have difficulty moving forward with a bigger succession plan. Here, flexibility can be useful.
Part two in this series will give an overview of the mechanics available in succession planning, with the goal being for advisors to understand how clients' motivations can be moved through the overarching options at hand.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
