5 Reasons Succession Plans Fail
First published in Crain’s Wealth – 22 May 2014
By all indicators, your business is successful. All your children are launched; your oldest daughter
has joined the company and is showing real talent. You’ve just expanded your beach house so
that there will be plenty of room when your grandchildren visit. You and your spouse are
planning a summer trip to Asia.
Even though you’re in perfect health, a colleague’s recent heart attack propels you to call your
corporate counsel and set up a visit with his tax and estate partner.
On the way to the law office, still feeling anxious, you and your spouse agree on objectives:
provide for your spouse during lifetime, treat all the kids fairly, protect the business and the
beach house. You decide to use up most of your gift tax exemption this year to gift 40% of your
shares outright to your children. You keep the remaining 60% but provide in your will that if you
die before your spouse, your shares will pass to a trust for your spouse. Finally, everything is
decided and the lawyer draws up all the documents. You and your spouse sign and initial (over
and over). Shortly thereafter, you pay the (not insignificant) bill and put the binder of documents
in your fireproof file (just in case).
Finally, you can breathe. You’re all set: you’ve done your estate planning. And you’ve earmarked
your oldest daughter as your successor. Your business succession is certain to be successful. You
can relax.
But you shouldn’t!
You’ve tackled a big part of the project, but there’s more to business succession planning than
estate planning and naming a successor. As with so many things in life, execution is the key.
Here are five pitfalls that have sunk many a succession plan:
Disinterest
Is it realistic to expect that the company will stay in the family after you’re gone? You may not be
able to imagine selling the business, but you should make sure the family wants to stay in
business together, and that they have the ability—talent, interest, enthusiasm, knowledge,
© Renkert Consulting Group LLC 2016
www.renkertthomasconsulting.com
experience, and financial wherewithal—to carry it forward. Bring in an experienced facilitator
and spend time talking with your family members about their vision for the future. Realistically
assess your collective ability to continue the business.
Infighting
If the family is committed to staying in this business together, and has the ability to do so, can
they make decisions together? This is less a question of personality and more of structure: do
you have a governance system that can enable business, ownership, and family decisions to be
made effectively? (And remember that sharing the beach house will require the same sort of
collective decision-making.) Invest in developing the structures and policies of organized
decision making, and start making decisions together now.
Inexperience
You’ve identified a successor—your daughter, in our scenario—but is she ready to take the reins?
How can you and your board help her gain the experience she will need to take over? Assess your
daughter’s preparedness. Executive education, mentoring, and membership groups such as YPO
can provide your daughter with useful experience and a broader perspective on the issues she’ll
undoubtedly face.
Insularity
Is your board up to speed? Entrepreneurs often distrust boards, fearing interference. But a good
board can make the difference between success and failure if succession happens unexpectedly.
Consider adding two or more independent directors. Present your company’s core strategic
issues to the board for discussion.
Are you ready to own a company with your children? For entrepreneurs used to making decisions
quickly, adjusting to wider ownership can take some time. Avoid the tendency to ignore the new
owners. Begin developing more formal decision-making processes, including regular meetings
with clear agendas. Avoid doing all the talking—your goal is to bring along the next generation of
decision makers, and to do that, they need to practice making decisions.
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Money
If you’re out of the picture, you won’t be drawing a salary to provide for your spouse’s living
expenses—your spouse will need distributions from the business. Remember, distributions,
unlike compensation, will flow ratably to all the owners. Will this situation set up conflict
between your spouse and kids as the owners of the company? Between your daughter as
manager and the rest of the family as owners? As a founding owner-manager, you may not have
thought much about distribution and compensation policies—now is the time to begin. Look at
compensation, capital reinvestment plans, free cash flow, distributions—do you have the
balance right to achieve your strategic goals, given the new ownership structure and a potential
change in management?
Now that you’re truly awake, consider this: succession planning is really long-term strategic
planning for your business and your family. Congratulate yourself and your spouse for tackling
the estate planning, and now get on with the rest.
Amelia Renkert -Thomas
Renkert Thomas Consulting LLC
+1 203 980 4084
[email protected]
@AmeliaConsults
© Renkert Consulting Group LLC 2016
www.renkertthomasconsulting.com