Business Succession Planning was the featured topic for one of the tables this month and the first thing that you realize with this topic is just how different the goals and plans of different businesses are. This is a topic where one-size-fits-all is not an option and within the room we had several different goals for succession at several different phases.  Even in a group with only 12 CEOs, we had family transfers, potential cash outs, and corporate perspectives in the room. Some were near term and others were decades away from planned execution yet everyone in the room had given this some serious thought.

The topic is easy to defer to tomorrow and doing so puts the business at risk. Clearly the CEO needs to step up and keep a reasonable priority on this or it will just idle in place because the conversations you need to have are difficult. Another challenge is the perspective of the parties involved where the intent is to pass the business to the next generation. The older generation may want or even need to cash out of the business to fund their retirement but the next generation might look at it as an inheritance with an expectation of being given the business. This was described as the ugly elephant in the room that nobody wants to talk about and I think that is a fair visual. Clearly these types of issues can cause the parties to start very far apart in their expectations.  The challenge is how to balance these and negotiate to something that works for all parties.

The cashing out is also not straight forward as some might look at holding ownership and structuring the business as a cash-cow while others are looking at it as a cash deal without the follow on risk. Both of these have very different risks and rewards that have to be considered and, of course, let us not forget the tax planning and legal requirements in this process.

Smaller businesses have some unique issues in this area and that is especially true if the owner is a primary player in the business. If this is true, as it is in many, then the owner has to make themselves expendable. If they fail to do this they limit the pool of potential buyers to someone with the same skill sets as the current owner. This smaller pool of potential buyers drives down the value of the business in many cases to almost zero. This problem is similar to the family business where the next generation is just not interested in the business.

One area, echoed by all the members, was the need to put together a trusted group of highly skilled advisors and to get the project on schedule and keep it updated. As a minimum this team needs to include your CPA, Lawyer, all owners present and future, and a facilitator for the difficult discussions. Others that might need to be involved are people involved in transference of critical business relationships such as key customers, investors, and many others.  An interesting part of this was the stress by several on the importance of keeping the agenda’s of the specialists out of the solution. The depth of experiences in the room really helps bring focus and priority to how unplanned items can get introduced in this area. The loss of key owners and managers can instantly put transition plans in high gear and if it has never been thought through it can put the entire business at risk.

This discussion showed that there are a thousand ways to create and execute a generational transition plan, all them hard. As is typical, this conversation could have gone on for several more hours but we have a commitment to our members to start and end on time so that is what we did.