Predecessors Must Select Their Successor
Dr. Leon Danco said it best about the successor. “You (as predecessor), must select, train and install the successor in your lifetime.”
This is especially true if you have more than one sibling working in the business, you should not leave it up to a battle among siblings. That always ends up badly. Don’t let them figure it out for themselves. You are the selector, not them.
Now, if there is but one obvious potential successor in the business, then this isn’t an issue for you. Their competence is an issue, however.
One Illinois owner had a master’s degree and a long stint with a major corporation. His son, who barely made it out of high school, did not score high enough to pass the Armed Forces Entrance Qualification test. You cannot build a foundation on sand and expect it to end well.
For those who have more than one potential successor, it can be tricky.
A family member can work in a specific position within the business for their entire career and never be on the Executive Track (successor track). Select from among those who have are completing the track. An offspring can be fifty before agreeing to the Executive Track.
You could wait to identify the one, but the work assignments of the offspring should follow the movements of jobs within the business so they will be ready. Even if they show a talent for one specific area, do not allow them to bury in and have that as their only skill.
The Executive Track is only open to those who agree to its terms and conditions.
You may have to fire anyone (related or not) who is chosen to be on the Executive track but who does not complete the training within the agreed upon time. Why? We usually don’t have the budget to carry two salaries so one has to go so we have money for the other.
One alternative to firing could be to move them into a non-successor track job with appropriate pay for the position if that is available.
You must make room for the person you select to be on the successor track. And there will necessarily be someone if your focus is the business continuation.
The Stakeholders Must Install the Successor
The stakeholders (usually led by the founder) must install the successor within their lifetime. But, timing is important. Don’t wait until you are sixty-eight to start.
On the other hand, exciting a successor about taking over before you are ready to be succeeded will result in a collapse of the succession and you could find yourself starting all over. Be sure to review the topic of succession at least by age fifty. That will give you time to plan and even have a false start or two.
Don’t Be Devious: A trade association meeting emphasized using deferred compensation and other vehicles to pull money out of a family-based business. It makes a lot of tax sense for the predecessors but no consideration was given to what that does to the successor’s outlook on life. Most of the time, successors see such a move as adding a lot of debt they have to pay off as well as time to their indentured servitude. Successors (the good ones) are smarter than that.
How to Transition to the Successor
I strongly advocate selling the business from one generation to the next or establishing a value based on what the business is worth and then worry about the various tax implications.
Negotiate the price between the predecessors and successor and reach an agreement that is fair to both. You can even have a longer-term arrangement where the business is valued now and again at the end of a transition period, often years later. The difference in the increased value can be split with the successor who has been in full charge of the business during that period.
Once the agreement is reached, then bring in the accountants and lawyers from both sides to implement the decision. Never bring in opposing accountants and lawyers to negotiate an agreement. That’s one of the reasons many business transitions don’t occur with the family relationships in tact.
And, as a successor, never accept a plan from the lawyers and accountants of the predecessor without independent counsel of your own.
A successor can be more than one. Two or more siblings who are active in the business can join together in an offer to purchase the business but they should come to an agreement among themselves as to their ownership and operation of the business prior to accepting the offer. Do not force an agreement upon them.
Considering transitioning to son/daughter or employee?
Our CPrint program has helped many prepare successors for business over the years. Let us learn more about your situation as you learn about our program in a no-cost or obligation online assessment meeting. Message me at tom@cprint.com if you’d be interested.
Ready to sell?
We provide on-site valuations of businesses that include an estimate of value as well as include recommendations of “fixes” that will improve earnings and thus value if there are issues there. We also can provide a non-onsite arms’ length estimate of value for planning purposes for businesses if not in need of fixes. If you are ready, then email me at tom@cprint.com and let’s see where you are.
If you’d like more information on how our program could help you, please message me at tom@cprint.com
Happy Trails,
Tom Crouser
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