I Will Survive – Succession Planning Keeps Businesses Alive

I Will Survive – Succession Planning Keeps Businesses Alive

Two times, Apple survived the loss of its visionary founder, Steve Jobs.

In both cases, the company not only survived, it thrived. How did they manage it?

It wasn’t a matter of just getting by: the company had systematized a vision for continuing success. Naturally, Apple worked best when Steve, bearer of mojo, was charging about inside its walls. Yet today, with Jobs truly and finally gone home from the office, they’re still sitting on top of their world.

To hear the company’s hypercritical fans, you might not believe it – what is their beef? Apple’s share price has never been higher. It ranks number-ten among corporations globally in revenue and profits, and Apple products remain polished and useful. Yet the letdown is easy to grasp: climbing the mountain is exhilarating; summitting anticlimactic – merely gravy, unless you bought Apple shares early, in which case you’re swimming in it.

You could never replace Steve Jobs, and Apple understood it. When he came home the first time, Jobs worked closely with his stand-in, Tim Cook, who still leads the company. Legendarily tyrannical, Jobs in fact allowed employees to run their own course, pick their own cols to climb, if only after long argument. He was grooming successors, in his mind for retirement, but we know how that goes.

A long time ago, I wrote about succession planning with reference to Louis Mosca, CEO of American Management Services, Inc. Succession planning is Mosca’s specialty, and he fears many executives are confused about how to proceed – running blindly towards retirement, he called it.

Business owners may think succession planning can be put off to some later date – after the company is legally formed and well up-and-running. In the formation stage, it seems superfluous; once in business, they think: ‘I’m still young and vital and the company is thriving. Why worry about retirement or anything bad, right now?’

Mosca says he habitually replies: Sure, don’t worry at all: your company’s business, never mind your own health and wellbeing, are fully predictable. Take all the chances you wish. It’s nice to know some droll wits patrol our glass cages.

Experts like Mosca agree: the best time to establish a succession plan is before the company’s foundation. Counterintuitively, the succession plan is the horse, company structure the cart, and planning for the end must come right at the beginning.

Consider: should you establish a corporation or an LLC? It depends on your vision of business continuity following a partner’s retirement or permanent leave, whatever the cause. Laws governing these entities differ considerably. The choice of formation state affects matters, too, from taxes to legal rights of partners and heirs. Wise choices must be made from the start.

If you do it wrong, you may end up killing more than a dead man’s dreams. When a key partner exits, poorly planned companies not uncommonly fold. Jobs are lost. Suppliers may suffer, even go down. The retirement benefits of former executives can vanish. Decisions delayed can cast a long shadow after the sudden loss of a founder.

Because every company is so different in ownership and executive structure, there is no one-size-fits-all form of succession plan. Yet there are clear types to guide business owners, with the details hammered out with specialist help.

The simplest arrangement to cover death, retirement or peaceable exit is a buy-sell agreement. Under this structure, the partner who leaves, in limo or hearse, agrees to sell their shares in the firm to the remaining partners.

It’s simple, yet potentially costly, as it implies the partners are tying up millions to cover the eventual cost. The usual solution is commonly life insurance: the company buys policies for all of the owners; one dies; and the company uses the death benefit to buy out the decedent’s shares.

The business, in whole or part, can also be passed to an heir. This is the usual procedure in family-owned firms, though we could take Tim Cook as the heir of Steve Jobs: he was carefully chosen and groomed, proved himself under fire. Family firms must follow this model, too. A succession plan can designate replacements for key execs, but care should be taken to update these directions to reflect shifting sands – everything changes with time. Family firms often fail in this regard, and that leads to court time and tears.

In small to medium-sized firms, the executive replacement can buy into company ownership by purchasing the deceased owner’s shares. This can be organized in myriad ways, but often is done while everyone’s alive, via a buy-sell agreement concluded with the designated replacement, commonly an in-house subordinate. A slightly macabre, but effective solution.

A deceased partner’s shares can also be sold to an outside party. This might mean introducing a stranger, a frightening prospect for the surviving partners. All depends on the company’s structure: for example, in corporations, if a shareholder’s interest is sold, in life or after, the buyer receives all rights of that shareholder, including a say in operations.

For LLCs, if an owner’s interest is sold, the purchasing party receives financial rights, but no claim on managerial rights. They only receive a voice in operations if the surviving partners say so.

Partnerships are infinitely variable and the customizability of succession plans mirrors their diversity. There are workarounds for many of these limitations, as long as everything is clearly and legally ensconced in writing.

A succession plan is a legal agreement, so after the partners’ initial discussions, specialists should be consulted.

Larger firms can consider one of the big four accounting firms or local talent with an equally proven record. Midsize companies can hire a certified public accountant for valuation work and a business attorney to prepare all the paperwork. Small businesses can do likewise, and maybe avail themselves of local Small Business Development Centers (SBDCs) and the Service Corps of Retired Entrepreneurs (SCORE), where they can find good advice and counsel.

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