Have a plan to pass the torch for succession planning success 

By Paula K. Barrett, CPA, ABV, CEPA, and William Onorato, J.D.

Having a well-thought-out succession plan is critical to the long-term viability of a business. Yet, according to PwC’s 2019 U.S. Family Business Survey, only 58% of family businesses have succession plans, and most of those are informal. 

What prevents so many business owners from considering and preparing for succession? On a daily basis, most are too busy working in the business handling routine tasks, immediate projects, and customer service to work on the business (planning and progressing toward long-term vision and goals). On a more human and profound level, thinking ahead to the end of one’s involvement with the business can be an emotionally fraught subject. A minefield of complex personal and professional issues too often leads to a do-nothing approach. 

Here’s the thing about exits: They are inevitable. The only real choice owners have is whether the departure occurs on their terms or someone else’s. The best way to avoid the latter scenario is to lay a foundation for succession as early as possible. While it is important to develop a framework and a formal plan, keep in mind that the specific details may evolve over time as circumstances and events affect owners, their families, and their businesses. Succession should be considered a process, not a transaction. 

The basics 

Succession planning is daunting, so instead of constructing an entire plan all at once, take it step by step. The key is to identify core issues, prioritize them, and then develop a manageable timeline. Be clear going in: the process may take years, not months. 

The first step in developing a foundation is to create a written plan that addresses the succession basics. Include all the major stakeholders in the development process and maintain a team approach throughout. Major stakeholders may include, but are not limited to, the owner, family members, key employees, and advisers (such as a business attorney, CPA, or family business consultant). What follows are some basic elements of a succession plan to serve as the building blocks for a strong foundation. Addressing each as separate modules makes the creation of a succession plan more plausible and manageable. 

Values and vision: Start by identifying the owner’s values and vision. As the cornerstone of the business, values and vision help the family navigate difficult decisions and set the tone for an organization and its culture. They also serve as guiding principles throughout the succession plan development process. After all, if all the stakeholders are not clear as to where the business and the family are headed, it’s far too easy to get lost or distracted along the way. 

Key objectives: Objectives will vary from business to business and family to family based on a multitude of factors. They may be short-term in nature (such as providing for an orderly transition in the event of a catastrophe) or longer-term (such as providing for a transition to future generations). 

Ownership: Identify the intended recipients of the business, both in the short and long term. Legal ownership of the business can be transferred through wills, trusts, buy/sell agreements, shareholder agreements, and other legal documents. If these documents already exist, review them to make sure they produce the desired result. If they do not, work with the legal adviser on the succession plan development team to compose the appropriate tools to achieve ownership objectives. 

Leadership: The legal owners of the business may not necessarily be the same individuals who lead it. For example, a spouse or children may not have the expertise or desire to run the business on a daily basis. That’s why it is critical to identify the next generation of leaders. If no leaders are identified or ready presently, assemble and train a team of advisers to step in and run the business in the event of a catastrophe. 

Exit plan: How will the owner transition leadership to a successor? Letting go of the business they created is one of the most difficult things an owner can do, but it is essential to the long-term viability of the enterprise. The dangers of an owner’s dependence on business value is discussed further down, as well as the significance of finding personal fulfillment and identity outside the business. 

Successor and management plan: How will the successor’s roles and responsibilities be expanded? How will this individual develop the skills and attributes necessary to lead the business? The transition from owner to successor cannot happen overnight; rather, it should be a gradual process in which the owner phases out and the successor takes on more responsibilities over a period of years. This is also the perfect time to clarify the organizational structure that will support the new owner. Consider the same questions around identification and expansion of roles and responsibilities to give the management team greater clarity and accountability. 

Communication: A plan does no good if it remains a secret. Start communicating as often as necessary before, during, and after the succession planning process. Transparency and full knowledge are critical components to driving accountability and engagement with the process. 

Regularly monitor and review: Families and businesses change, and so must their plans. Make sure to review the succession plan at least annually and adjust accordingly. 

Accelerate business value 

No matter what type of transfer or exit an owner has in mind, its success or failure is related to the quality of the business and how well it is operating. That’s why business value acceleration is not a finite task or distinct project; rather, it is a process that should be ongoing throughout the life of the business. The acceleration process focuses on value growth and the alignment of business, personal, and financial goals. With a constant focus on value, the timing of an exit matters less because the organization is always ready to adapt to new leadership. What’s more, the value acceleration process can serve as a leadership development tool to support succession, ease the transition, and provide a measurement system for progress. 

Derisk the business: Value acceleration starts by identifying and mitigating risks. Consider the impact and response to unplanned events – whether that’s a natural disaster, economic risks, personnel changes, or even a global pandemic. Are business insurance levels adequate to cover interruptions or losses? If you don’t have contingency or continuity plans in place, develop them now and revisit them annually for changes. 

Tangible and intangible value drivers: Once you’ve reduced risk, it is time to bolster assets and attributes. There are two categories of value drivers: tangible and intangible. The tangible portion includes cash, accounts receivable, inventory, and fixed assets; the intangible portion includes assets such as brand name, supplier relationships, and proprietary formulas, technology, or products. The nature of the business or industry will dictate whether it has more tangible or intangible value. For example, most service businesses will have greater intangible value, while physical asset-intensive businesses will have greater tangible value. 

Intangible assets are often the primary contributors to a company’s earning power, allowing it to create value through revenue growth, innovation, and profitability. Here are three of the most common intangible assets that drive company value: 

Customer relationships: Companies that measure and manage customer retention are making an investment that will reduce operating costs, generate referral activity, and increase long-term profitability. 

Trademarks: Respected and easily identifiable trademarks can help companies expand more easily into new products or services, attract top talent, influence buying decisions, and enhance marketability in the event of a sale. 

Workforce in place: Having a well-trained, highly skilled employee complement in place not only drives the inherent value of a company, it also attracts potential buyers who would be spared the considerable expense of investing in an entirely new team. 

Reduce owner dependence: When taking stock of the tangible assets and intangible elements that drive value, make sure they are transferrable to future leaders or potential buyers. Owner dependence is a huge threat to succession plans and ongoing viability. To mitigate this, create a structure that will allow the business to function without the current owner playing an integral part. Start by building a talent pipeline that will identify and groom future leaders and facilitate the transfer of knowledge and connections. Bring emerging leaders into the decision-making process and give them stretch assignments to fuel confidence and competence. Introduce more of the team to key suppliers or vendors so new relationships can develop. This process may uncover skill gaps, so allow for ample training and learning opportunities to address them. 

Plan, execute, and measure: Planning and execution are key to achieving the value-acceleration strategies mentioned. Ideally, the succession planning process would begin three to five years before the owner’s departure timeframe. A staggered and phased approach helps assuage worries associated with the ownership transition and provides everyone involved with a framework to track progress and achieve goals. Hold team members involved in the process accountable and aligned with regular checkpoints, forums for feedback, and clear roles and responsibilities. 

Life after the business 

The post-work phase of succession planning is equally important, but it often receives far less attention. Many owners discount their future plans as something to be sorted out later; as something less worthy of their time during the planning process. In reality, owners should consider their options for their next act at the same time they are solidifying their exit strategy. 

Think about it. Much of an owner’s life revolves around the status of their business; remove that focus and owners can be left with feelings of isolation or lack of purpose. Owners who prepare for the next phase of life are better equipped to counter these emotions with different ways to find meaning and motivation. Here are some suggestions to help maximize this new chapter. 

Learn from others: Reach out to peers who have been through an exit. Meet with them and ask about their experience. What went well for them? What would they do differently? 

Develop a six-month game plan for after the transaction: As the exit approaches, pull together a plan for the first 180 days. Before the transfer or sale, owners are generally in a positive frame of mind, which allows them to think favorably of the future and what they always wanted to do or accomplish if only there was more time. An extended vacation, visiting with family and friends, joining or coaching a recreational athletic league – a business owner should list several things they’d like to do and develop a plan to make it a reality. Above all, owners should take time to celebrate the success they worked so hard to achieve. 

Personal reinvention: For many owners, their identity is intertwined with their business, so an exit can feel like a loss. Reconnecting with things that spark joy and finding new sources of fulfillment will reduce the emotional toll. There are many opportunities for former business owners to pay their experience forward, stay engaged with peers, and use their skills in different ways. Joining a local board is an opportunity for philanthropy, personal connection, and intellectual challenge. Small-business incubators are another way to tap into mentoring or investment opportunities. Many colleges and universities have opportunities for retired business owners to get involved on campus. Reach out to alumni or community engagement offices to learn more. 

Work with a coach: Just as it is important to work with trusted advisers to plan and execute the transfer and sale of a business, it may be helpful to seek professional guidance on the transition out of ownership. Someone without a personal involvement or emotional attachment can serve as an unbiased sounding board, support the owners through decision-making processes, and guide them as they build a new structure for their lives. 

It is best to start as early as possible, but it is never too late to get ready for an orderly and optimal succession. Putting energy into planning for an ownership exit will pay dividends for everyone. With the support of a team of professional advisers, owners and their families can lay the foundation for a business succession that addresses operational, financial, and personal considerations and provide the peace of mind and satisfaction of ending this chapter on their own terms. 

Paula K. Barrett, CPA, ABV, CEPA, is a partner in the consulting services group of RKL in Wyomissing, Pa., specializing in business valuation and litigation support services, acquisitions and sales of closely held businesses, and general business planning services. 

William Onorato, JD, is a senior wealth strategist with RKL Wealth Management in Lancaster, Pa., advising high-net-worth families on multigenerational planning, legacy planning, business succession, estate planning, and philanthropy. 

Reprinted with permission from the Pennsylvania Institute of CPAs.