Cross Over the Missing Middle to Secure Succession Plan

by Paul T. Lally | May 30, 2019

 


In more than 30 years of working with privately owned businesses, I have too often seen what can only be described as an ongoing blind spot regarding succession planning and the requisite good governance that should underlie it. This is an odd outcome for a group of individuals who are generally committed to family, community, and building a legacy.

 

For many private businesses, a strategic bridgework is needed that connects two visions: the entrepreneurial vision that sparked the formation of the business and the long-term vision that enables a private company to pursue goals far into the future. What this bridge will span can be considered “the missing middle,” the often unaddressed gap between business building and succession planning.

Here are several key observations:

  • Only about 20 percent of entrepreneurs have a written succession plan.
  • As much as 95 percent of an entrepreneur’s net worth is equity in their business. Few have a separate asset base distinct from their business.
  • The majority of an entrepreneur’s income is derived from the business.
  • The average time between corporate planning reviews is 10 years.
  • Most firms have never had a formal valuation conducted.
  • Less than 30 percent of privately owned businesses are successfully transferred to the second generation; the successful transfer to a third generation is only at 15 out of 100 companies.

For those private business owners who have become more aware of the need to prepare for succession planning, who have crossed over the missing middle, they face two difficult decisions:

  • Short-term: “How do I plan for the management or perpetuation of my business in the event of an unforeseen occurrence, such as my death or permanent disability?”
  • Long-term: “How and when will I perpetuate my business into the future while realizing value for what I have built?”

Before addressing either question, first be clear about what succession planning is and what it is not. Understand that it is the process of deciding when and how you would like the business to be managed or transitioned to protect the business, its employees, its customers/clients, and its value against unforeseen events such as the premature death or permanent disability of the founder. It also considers to whom you would ultimately want to leave or sell the business, and how to fund the transfer or sale. Succession planning is a game of inches, with some advantages here, other advantages there, and still a completely different advantage in some other part of your circumstances. Taken together, significant advantages will be achieved, but the pitfall is counting any advantage as “too small” or “not worth it.” Oftentimes, decisions made now, or not made, will be a major factor in determining future outcomes.

A succession plan needs to recognize that the current strategic plan and ownership objectives both play a significant role in the ultimate shape of the organization. A business owner must pull together experts from numerous disciplines such as tax, legal, finance, valuation, business consulting, and investment banking to present realistic, attainable, and tailored options. A succession planning process needs to challenge thinking on the current business and future goals to develop a detailed road map customized for the company and its situation, with actionable recommendations and timelines. Just as important, plan for issues that may not be apparent now but could affect the company going forward.

Once a plan is implemented, it doesn’t mean it is complete. While continuing to operate the business for the next several years, your business model will evolve, as will the succession plan. Added personnel; enhanced depth and breadth of offerings, services, or products; and potential future acquisitions will undoubtedly alter the dynamics of the business. Some changes may seem minor or incremental, but over time and taken collectively they have the potential to materially affect the business, and they should be recognized and addressed.

Developing long-term and emergency succession plans are a business owner’s fundamental responsibility, and they should be addressed well in advance of when they may be needed. Long-term succession planning is significantly more complex than merely identifying the next CEO. Leading companies approach succession planning as an integral part of the long-term development of executive talent. Plans should be flexible to account for changes as corporate strategy shifts. A regular reevaluation of the succession plan not only mitigates the risks associated with leadership transitions, but also capitalizes on opportunities.

Effective succession planning will help define the company’s long-term strategic goals and challenges, identify the qualifications and expertise required to meet the company’s needs, and actively develop the diverse teams required to achieve success and build sustainable value. Succession planning is a tremendous opportunity to perpetuate the business owner’s values into the future.

 


Paul T. Lally is lead partner of the business transition group for Wipfli LLP in Media. He can be reached at plally@wipfli.com.

 

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