Scoring Big with Succession Planning

In the fall of 1997, legendary University of North Carolina men’s basketball coach Dean Smith retired after 36 years at the helm. He was succeeded by his long-time assistant coach, Bill Guthridge, who inherited a stacked team including future NBA stars Antawn Jamison and Vince Carter. His success all but guaranteed, Guthridge led the team to two Final Fours in his three seasons as head coach and was named Naismith College Coach of the year in 1998. All told, Tar Heel fans couldn’t have asked for a more seamless transition from Smith to Guthridge—though, as one of those fans, I may be biased.

In a similar fashion, all business owners envision an orderly transition upon their retirement: handing over the keys to the office and driving off into the sunset. That assumes they—like Dean Smith—will have control over when they retire and can prepare their successors accordingly. However, should things not go as expected, advanced succession planning ensures that the owner’s family, business, employees—and, ultimately, customers—aren’t left in the lurch. Having a plan helps owners maximize their company’s value to buyers and minimize taxes and risk to the business, while reducing the stress and burden on family and key employees.

"Planning is bringing the future into the present so that you can do something about it now."
—Alan Lakein, author

I’m not going anywhere soon. Why start planning?

The best succession plans are designed to achieve the goals of the owner(s) while meeting the needs of other major stakeholders, including family, co-owners, managers, and employees. These plans identify who will assume ownership and management duties (if not the same), and—to minimize internal disputes—why those people were selected. They also outline the structure of a sale, including valuation methods and financing options, which protects an owner’s family in the event of an unexpected disability or death.

Common means of transitioning ownership

Selling your business to a partner is one of the easiest ways to ensure continuity in how the company is managed. Co-owners know your strategy, employees, customers, and suppliers, so there is less of a disruption. If the ownership succession is planned at your passing, we frequently see a buy-sell agreement financed with life insurance to provide liquidity to one’s family. If the ownership succession will happen before that, multi-year buyouts are common.

Passing your business on to your child or other heir is a common goal in family-run organizations, though owners often have to navigate delicate family and employee dynamics. How will other members of the family react to the “chosen one?” What steps can be taken now for the heir to earn the respect of her future employees? If transitioning the business to an heir is a priority for you, it is critical to ensure she actually has an interest in joining the business.

While you may have started the business from scratch and held a long line of unofficial titles ranging from head of sales to chief coffee maker, your heir didn’t. Have you exposed her to the variety of job functions that help you make important business decisions? Consider having your kids help with an assortment of roles from an early age during summer breaks and after graduation. In addition to letting them determine if it’s a path they wish to follow, it provides an opportunity to begin developing relationships within the organization. Do you want to keep your business in the family but worry about creating a sense of entitlement among the next generation? I’ve seen business owners navigate that concern by selling the business to their kids rather than simply handing them the keys to the kingdom.

In the event that passing your business on to your family or a co-owner isn’t an option, we frequently see business owners sell to a key employee, an outside party, or back to the company itself through, for example, employee stock option plans.

"A goal without a plan is just a wish."
—Antoine de Saint-Exupery, French author

How do I get started?

Step 1: Identify Goals.

Goal identification is paramount—not just for you, but for your stakeholders, including management, key employees, and family. Questions that you should consider include:

• How much income do you need going forward? First, think about your current cash compensation and any additional company benefits. Don’t forget to include perks such as your car, country club memberships, and other expenses you may be expected to pick up after your retirement.
• Do you wish to maintain an investment in the company? If you’re selling to your family or key employees, they may desire a staged sale over a period of years to financially incentivize your continued support preparing the next generation of leaders.
• What are your views on legacy? Does the business need to continue in its current form? This is especially relevant for companies named after their owners.
• Does philanthropy play a role in your legacy? How do you envision your philanthropic activities?

Formalize an agenda during family meetings—and stick to it! Take notes during these conversations for later reference. Focus on the needs and goals of both your family and yourself. Communicate to your heirs the advantages and disadvantages of running a family business and be transparent about the current state of the business. If you haven’t previously been open with your family about the business, there may be a wide gap between what they believe to be true versus its current financial situation. Explain what the succession planning process will entail so they know what to expect. You may wish to explore using a third-party facilitator, such as your relationship manager, to help navigate difficult conversations.

Additionally, don’t forget about the needs, expectations, and desires of the company’s other stakeholders. Communication is key throughout the succession planning process, but particularly at this stage. Begin by having individual conversations with key stakeholders to share your thoughts and gauge their reactions. As you plan for these discussions, be transparent about the topic and give them time to prepare—in other words, don’t surprise them during a one-on-one meeting. Including your top management in these early conversations minimizes the likelihood that they’ll jump ship during the transition. Use group meetings to provide an update on the process; this will help limit the number of rumors that are bound to surface.

Step 2: Identify management succession.

This is not the same as ownership succession, though there may be some overlap. Who is willing and has the expertise required to take on management responsibilities? Don’t plan for a key lieutenant to assume management if he or she plans to retire shortly after you (more on that in a bit).

Be sure to do the following during this stage of the process:

• Assess what you do for the company, especially if you don’t have a true job description. Keeping a journal or reviewing your calendar will give you insight into how you spend your time supporting the business.
• Evaluate the skills and abilities of the management team and any potential successor. It is important for you and your management team to complete this assessment in order to address any mismatches of expectations.
• Identify what your management team and potential successor wants, and plans, to do.
• Consider financial incentives to ensure your team is vested in the success of the transition. I see more success when stakeholders have skin in the game, ensuring a stronger commitment. This means that your team needs to have some money at stake rather than you simply allocating them phantom stock.

Step 3: Summarize what you hope to accomplish in the succession.

This is where you memorialize your thoughts and plans in a memo or letter that should address the following questions:

• What’s the value for you? How is it structured—lump sum or lifetime compensation?
• Who will own the business going forward and how will ownership be structured?
• Who will hold management positions?
• How heavily do you want to be involved? Do you intend to retire to the coast or would you like to remain a consultant or key “rainmaker” for the organization?
• How will other goals be met?

Step 4: Bring in the pros.

Now is the time to assess whether your current advisory team is still appropriate and if specialists exist to address specific areas of need. Sharing your letter from Step 3 with your advisors enables them to understand your ideal scenario; it also provides an explanation to other stakeholders, including customers and suppliers, about what to expect. Meet with your advisory team regularly to ensure no one works in isolation. Include expertise in tax, legal (both business and estate), wealth management, insurance, and any other relevant parties.

Step 5: Revisit the plan regularly until time for implementation.

Sometimes goals or needs change unexpectedly, frequently due to health issues, death, divorce, or the general business climate. Ensure these are reflected in your plan prior to implementation.

It’s every entrepreneur’s hope to leave a business in the same manner as Dean Smith. However, even the seemingly best-laid plans can have holes. Just three years after accepting the coaching baton from Dean Smith, Bill Guthridge followed him into retirement. To the dismay of Tar Heel fans, Coach Guthridge’s heir apparent, Roy Williams, a UNC alumnus and former assistant coach, decided that he wasn’t ready to leave his head coaching gig at the University of Kansas just yet. This hiccup illustrates the importance of keeping the lines of communication open for all parties. Ultimately, the Tar Heels hired Matt Doherty, a member of the 1982 team that won Dean Smith his first national championship. Unfortunately, Doherty’s three-year tenure was rocky from the start; as a result, the program missed its first NCAA tournament in nearly 30 years.

The experiences of the Carolina basketball family almost two decades ago highlight the truth behind author James E. Hughes, Jr.’s writings in Family Wealth: Keeping it in the Family, that “the most important role in the management of an enterprise is arranging for orderly succession.” Balentine recently heeded these wise words by creating a succession plan that culminated in the June 1, 2018, promotions of Adrian Cronje to chief executive officer and Brittain Prigge to president. Similarly, we have helped many entrepreneurial clients through this same important, but often difficult, journey. Reach out today if succession planning is on your to-do list; after all, it’s never too early to start.