By Don E. Ray, Portfolio Reinsurance
Being on the Board of the International Succession Planning Association™ (ISPA), I believe succession planning is a multi-faceted endeavor. The Succession Matrix represents the planning factors the ISPA Board has confirmed as the predictable challenges to the continuity of a business through the next generation. Depending upon the gravity of the circumstances, any one factor can significantly handicap the probability that a succession will succeed.
It is also important to recognize the interdependent nature of the Succession Matrix. Due to the compounding impact of interdependence, extraordinary strength in some factors can support weaknesses in others while shortfalls in multiple factors can mean significant planning is needed.
Assessment scoring across the Succession Matrix factors provides a valid predictor of how well a business is prepared to deal with the challenges of succession, and the planning areas in which remedial attention is needed to achieve the goal.
The Ten Interdependent Succession Matrix Factors
1. Owner Motivation and Perspective
The motivation of a business owner is critical to the succession of a business. The attitude of the owner toward the business impacts creditors, suppliers, vendors, franchisers, employees and managers.
The culture of a business ultimately takes on the motivation, values and priorities of the owner. Subsequently, the culture of the business has a significant impact upon the fulfillment of implied partnerships with vendors and the ultimate achievement of succession goals. Clarification of the owner’s personal goals is crucial to the foundation of succession planning.
2. Personal Financial Planning
A fundamental succession planning consideration involves using the fruits of business success to achieve personal financial independence from the business. Financial independence enables you to initiate an exit strategy and empower succession by incurring the inherent risk of transferring leadership and control of the business to minority partners, family members or key manager successors. A pragmatic personal financial strategy also provides you the freedom to sell the business for what it is actually worth versus continuing to own and manage the business under duress, simply to maintain lifestyle and/or personal security.
3. Business Structuring
Business structuring has a direct impact upon tax on business profits, gift tax on business transfers, cash flow to shareholders, financial security of owners, management effectiveness, estate planning, etc. Appropriately designed and coordinated stockholder/partner agreements preclude disruptive negotiations during strife and give participating principals the peace of mind that their interests in the business represent real value. Employment agreements can enhance exit strategies by authorizing the continuation of compensation and health benefits after retirement or to a spouse after death.
4. Business Performance
Operational success drives market share, customer satisfaction, cash flow and the value of a business, which impacts perspectives of owners, management, employees, vendors, suppliers and franchisers. Additionally, operational success is critical to achieving the profitability momentum required to endure predictable challenges to business continuity and is usually derived from multiple sources such as good location, good product line, focused leadership, team synergy and a willingness to embrace change.
5. Strategic Planning
Succession planning is a fundamental, long-term strategic issue. One of the primary drivers as to how you operate a business is what you intend to do with the business when you no longer are able or desire to be involved in operations. Several of the more important contingencies for success and survival are the confirmation of a mission, identification of reasonable goals and the willingness to forecast and adapt to change in the strategic business landscape. Therefore, the articulation of a long term management, leadership and ownership strategy is critically important to Succession Success.
6. Leadership and Management Continuity
Business succession is not a solo endeavor. Family members, partners, shareholders, directors, distributors and franchisers rely upon competent, motivated and trusted managers to carry out the business mission. Most of the value of a business is in the resourcefulness, commitment and enthusiasm of the management team that optimizes resources for the achievement of business goals. Therefore, the development and constant regeneration of a management culture that can sustain and enhance historical success is imperative to Succession Success.
7. Management Synergy and Teamwork
Teamwork is a critical component to successful collaborative effort. Business succession is a formidable, collaborative goal that requires optimization of all resources including the opportunity to achieve synergy among all those who are Seeking Succession. The call for team synergy includes ownership, supporting family members, aspiring successors, management, employees, vendors and suppliers. Teamwork is often times not a natural behavior among these highly ambitious and aggressive parties, but team dynamics can be promoted, taught and imbedded within organizations that are truly dedicated to high quality, high performance and high customer satisfaction.
8. Successor Preparation
Business succession is dependent upon an available, capable and committed successor. Unreasonable assumptions regarding perceived rights and responsibilities of family successor candidates are the root of most successor problems. The development and communication of reasonable expectations for entry into the business as well as accountability criteria for matriculation through progressive levels of responsibility are critical to gaining experience and earning the respect of key managers. Assessment of capability and commitment is best addressed through well thought out, customized training, mentoring and career progression programs that offer open communication and third-party accountability.
9. Family Governance
Both employed and unemployed family members of the business owner impact the well-being and mission of a business. Being a member of a family owned business has inferred power that can impact the attitudes and enthusiasm of employees and the productivity of the business. Furthermore, family members are role models for both the right and the wrong behaviors and attitudes. Misunderstanding can easily develop regarding the motives of family members that ultimately impact the business mission.
Through the development of policies and programs such as a Family Business Council, Operating Board of Directors, Family Member Employment Policy and Family Member Performance Expectations, the interface of family with the business can be managed and optimized. Subsequently, there will be substantially less vulnerability to family actions or attitudes that adversely impact family harmony and business productivity which are both critical components of Succession Success.
10. Family Dynamics
Family relationships can be an inherent advantage or disadvantage to succession planning. Effective interaction among the family members of current and/or prospective business owners is critical to achieving the unity and harmony needed to address the predicable, complex business succession issues. Bickering can frustrate, distract and weaken the focus and commitment of the management team.
Establishing the forums and processes for effective intra-family communication provides the building blocks for a unified succession vision and collaborative efforts for the achievement of business succession goals.
As you can see Succession Success is much more than simply estate planning with a good will. The ISPA carefully considered these components of Succession Success and hope you and your trusted advisors will as well.
Don E Ray works at Portfolio…THE Reinsurance Company for Auto Dealers. He can be reached at 917-359-5128 or dray38138@gmail.com
