The Missing Piece in Succession Planning
Many people say there are seven major steps of business succession planning. 1) The initial reflection period, 2) evaluation of ownership alternatives, 3) grooming the next generation of owners, 4) determining a selling price or valuation for the business, 5) tax and estate planning, 6) obtaining financing, and 7) assuring a steady income flow to the senior generation via financial planning.
But there are some problems with these seven steps. First, the focus is on ownership of the business, and ownership only. Ownership is mentioned twice in the seven steps. The final bullet point assures steady income flow to the senior generation, and if you think about it, who do family business advisors, and bankers, and lawyers, and CPAs work for? They work for the senior generation.
The focus is entirely on ownership succession, but who cares what the future ownership of the company looks like? If somebody hasn’t addressed the management succession of the company, who’s going to run the business? Who’s going to do the thankless, countless tasks that it takes to keep a small business operating profitably? The seven steps include grooming the next generation of owners. Not managers, owners. But who is going to run the business? If the business isn’t run profitably after the senior generation departs, their financial security is a goner. The business is a goner. There are no jobs, there’s no employment, there’s no satisfied customers.
And yet, most family business advisers focus on the needs of the senior departing generation, and don’t focus on the needs of the successors. They don’t do any forecasting. They don’t do any financial modeling to see if there is a clear strategic way for the business to keep producing revenue and profits, or if the business likely to fall off when the senior generation departs, because they have all the business contacts and do all the selling. Nobody looks at that stuff.
It’s a two-party equation. Number one, you’ve got to satisfy the needs of the departing senior generation. They deserve it. They deserve to ride off into the sunset and enjoy their golden years. But somebody’s got to look after the successors as well. If you don’t balance the successor side of the equation, the senior generation doesn’t have that security that they’re looking for and, surely, the junior generation doesn’t.
So, when you’re thinking about succession and you read all these articles about it, always pay attention. Are they talking about ownership succession or management succession? Do they talk about the needs of senior generation and the successor generation? Because if you don’t talk about both sides of the equation, you’re not doing it right.