• Seize the Day—Get a Jump on Succession Planning
  • July 18, 2011 | Authors: Jason P. Mahar; Ronald E. Roden
  • Law Firm: Miller Johnson - Grand Rapids Office
  • Succession planning is critical to the long-term success of any company. Transition ownership; transition management; minimize the taxes payable in connection with the transition of ownership; and, in a family-owned business context, maintain harmony among the company’s stakeholders—those are the goals of an effective succession plan. Unfortunately, many companies don’t think about succession planning until it’s too late to take full advantage of everything it has to offer. It’s essential to get a jump on the process. Here are a few good reasons why.

    Keeping Your Options Open

    Succession planning is complicated, and it requires a company and its advisors to address some difficult issues. Professionals have developed a number of strategies and mechanisms to deal with those issues effectively. But many of the most effective ones take time to work. For instance, take the strategy of transitioning ownership in a family owned business by using tax-free, annual gifts of stock. Under current tax laws, you may give up to $13,000 worth of stock, tax-free, to any number of recipients (subject to certain lifetime tax exclusions). Using this annual gift-tax exclusion, your senior generation of stockholders could transition ownership to a younger generation of stockholders largely (or in some cases, entirely) tax-free. The only catch is the time it takes to achieve that result. That means your company needs to start the process early.

    Retaining Key Managers

    Getting a jump on your succession planning will also increase your company’s chances of retaining its key managers. Succession planning is a collaborative process. It requires open and honest communication between a company’s current and future owners and managers. Opening the lines of communication helps current owners and managers learn what the next group expects for their future with the company. Often, key managers expect a larger ownership or management role than current ownership assumes they do. Once these expectations are known, your company will be able to develop a plan to meet them. Unfortunately, these expectations are often discovered when it’s too late to do anything about them. That often results in key managers looking for other opportunities. There are no sure-fire ways to retain key managers, but getting a jump on your succession planning and involving the managers in the process can go a long way toward that goal.

    Developing Leadership

    Done properly, succession planning can also help you develop your company’s future leadership. During the planning process, your company will discover which key employees want to—and will be able to—take on high-level management roles down the road. Armed with that information, you can work with those people on creating leadership plans. The plans would detail, for example, the skills the potential leaders need to gain and the experiences they should seek in order to position themselves for the management roles they want. But all of these advantages will be lost if you put off getting to work on your succession plan.

    Market Readiness

    In many cases succession planning will lead to the sale of the company to an independent third party. Even in those cases—or perhaps especially in those cases—management should get a jump on the succession-planning process. Preparing a company for sale takes time. Most companies have to spend time reviewing and addressing legal issues, shoring up deficient operations and investigating potential buyers. Developing a succession plan will help with this process. First, it forces your company to specifically consider whether the sale is the appropriate end-strategy. Second, if done properly, it will help you identify the issues that need to be addressed before the company can be sold. The result is that your company will be better prepared and more market-ready when the time is right to sell.

    A company that starts the succession-planning process early benefits from strategies and mechanisms that need time to develop, the retention and development of key managers, and the ability to make an exit when the timing is right.