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April 27, 2020

You Can’t Spell Succession Without SUCCESS

Strong Succession Planning Supports Continuity & Company Value

Key Takeaways

  • Lack of clarity about the company’s future diminishes enterprise value.
  • Succession planning is a process, not an event.
  • (Independent) board participation is crucial.
  • Strong, well-communicated plans facilitate business continuity and preempt future conflict.

Many private company owners dismiss the importance of planning for their and their management team’s succession. However, the family, shareholder and business dysfunction that too often result from the lack of a plan are clear evidence of why it is so crucial. 

The more successful the company, the higher are the stakes and the more important succession planning becomes. But succession isn’t simply an organization chart or an event. It’s a living process – supported by documentation and communication – which should be continuously revisited and refined, adapting to current circumstances.

Independent Board Involvement

A succession plan is a critical directive for a business aimed at benefiting all shareholders. It is probably the most difficult topic to raise with a founder, which makes it one of the most important areas of focus for the – ideally, independent – board of directors.

Why? CEOs and founders often cringe at the mere mention of the subject – it’s threatening, even scary. But waiting for a CEO to fall seriously ill or an executive to flee to a competitor is a recipe for disaster. At that point, overhanging urgency and emotion hinder effective decision-making.

A confident leader recognizes that succession is an important responsibility of the CEO and board. The board should actively promote and participate in architecting a well-defined plan. Independent board engagement, in fact, establishes credibility for the planning process (if this sounds like advocacy for independent board governance, it is!). 

Succession plans developed solely by company founders– who already have difficulty with the issue – naturally tend to be insular, at least somewhat biased and overlook key elements. When structured optimally, independent boards provide experience-based wisdom and objectivity. They also provide a buffer between family and senior management if any aspect of the succession plan becomes controversial.

In this regard, the key to succession planning is to place the interests of the enterprise above those of any individual or family member. This goal is particularly important in family-owned companies since families generally grow faster than businesses and key individuals wear multiple hats, (shareholder, executive, and family member). Conflict among shareholders resulting from uncertainty or different views about the road ahead can negatively impact the value of a company.

Constituent Communication

A well-conceived plan is just the start. The plan must be effectively communicated to key constituents, primarily senior management and shareholders, who will feel more secure knowing that a plan is in place. Depending on the circumstances, communication to other stakeholders – such as banks or other lenders – may also be appropriate.

Communication also should be ongoing, conducted at the plan’s creation and with each annual review by the board. Communications also should be documented, as part of board meeting minutes and annual performance reviews.

Succession Planning Maximizes Entity Value

Maximizing value is a function of controlling the timing of events, e.g., raising capital or selling. But regardless of how rosy things may look today, predicting the future – such as the departure of a key manager – is impossible. Events (even pandemics!) occur suddenly and without notice. Companies caught flat-footed and ill-prepared can prematurely be put into play. Such lack of readiness will be reflected in reduced enterprise value.

In contrast, companies with plans at the ready will benefit from exercising more control over the variables. Planning for what lies ahead and being able to choose when and how to act, contribute to value maximization.

Succession is a difficult topic, particularly for founders who think their success makes planning unnecessary. But succession planning takes on new meaning when recognizing that preparation for the next chapter can minimize the chance for family and shareholder conflict. If that isn’t motivation enough, recognize that the absence of a plan can seriously diminish the value of the company you have worked so hard to build.

Key Elements of Succession Planning:

  • Initiate the process
  • Define a desired outcome
  • Establish likely time frames
  • Encourage board involvement
  • Prioritize company over individual interests
  • Effective communication

For more insights from the series, The Path to Private Company Liquidity: A practical guide to M&A for business owners, click here.

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