What's in Succession Planning for Me?
Some things are more obvious than others. However, occasionally I am asked “why should I do succession planning?” My response is that succession is not a natural progression of an enterprise. You have a right not to care but if you don’t care, your employees, bank, strategic partners, and community who love you are going to resent you.
More often the WIFM question comes from individuals who have recently spent a small fortune updating their wills and buying an insurance policy. This question is legitimate to them because although the business and the family may be coming apart at the seams, there is overwhelming conviction that he/she has for the near term spent all the time and money they are going to on the welfare of the next generation. The more appropriate question is: How can I make more money to pay my bills including that cursed insurance premium?
And, in other circumstances, the question may also be legitimate because the individual does not have any successors. The apparent reasonable (but incorrect) conclusion is that succession planning is not applicable to me because I am planning to sell. Why should I waste my time and money on succession planning if I am planning to pass this baby on to the highest bidder?
The answer I want to drive home is based in the definition of succession. If you look at the root word independent of all the business continuity implications, you should recognize that “Succession is the Continuation of Success.”
The bottom line answer to “why should I do succession planning” is because SUCCESSION PLANNING BUILDS BUSINESS VALUE. Prospective buyers, banks, Wall Street and estate tax auditors all recognize that business value is dependent upon the predictability that the earnings will continue after a transfer of ownership occurs, whether by sale, gift or estate bequest. These same parties also understand that value is not all about today’s earnings.
Contrary to popular belief, succession planning is not just adopting a new will and/or buying an insurance policy to pay estate taxes. Succession planning is a pro-active initiative to address the interdependent planning issues that impact the continuation of success. And the continuation of success drives business value. Sure estate planning is involved but it is just one of the components of the Succession Matrix which also includes: personal financial planning; owner motivation and perspective; successor development; family harmony; key manager motivation and retention; strategic planning; business performance and structuring; team synergy; leadership and management development and business governance. In fact, estate planning is not even a major component of the Matrix, it is a sub component of personal financial planning along with building independent wealth, exit strategy and credit continuity. Another potential surprise is that business performance (profitability), although very important, is only a single factor because value is not based exclusively upon what happens today. Value is based upon the forecast of profitability into the future.
So, to prove that no one should ever accuse me of promoting rocket science, let’s cut to the chase. Irrespective of whether you have a vibrant business, kids still in little league or you are just waiting for someone to liberate you with a wad of cash, succession planning is a worthwhile, virtuous endeavor. Any improvement you can make in the critical factors of the Succession Matrix will build value in your business. The value created by succession planning will give you the peace of mind that your heirs will not trip and fall after the transfer of control that your partners can make good on the installment note to purchase your stock or put more cash in your pocket when you sell the business.
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