The Pain of Not Having a Succession Plan

I suspect that every business owner has a regret or two, wishing they had taken a different course of action or made a different decision.  Failure to perform one action in particular can result in significant heartache and regret - that of not establishing a succession plan early on in the businesses life.  While even sole proprietorships should have a succession plan, it is particularly important to have a succession plan when there are multiple active partners, each having a say in the way the business is operated.

When two or more people join forces to create a business entity, everyone is enthusiastic and cooperative.  Early on, the parties tend to come to agreement on the issues as they come up, partly because everyone wants the business to succeed and partly because the early issues are relatively minor in nature.  Agreements are typically not committed to in writing, as everyone is lulled into believing that the collegial atmosphere will continue forever.  This is the honeymoon period and like the honeymoon of a marriage, it doesn’t take long for the cracks to form.

As the business matures and partners begin to settle into their roles, differences in personalities, management style, priorities, interests and a myriad of behaviors can begin to place a strain on the business.  Unless the partners can develop a strategy for addressing the differences, cracks can grow into canyons.  On more than one occasion I have encountered businesses in which the partners’ philosophy and approach to operations had diverged to the point they were polar opposites.  The big losers in this are the employees.  With conflicting direction being given them, they realize that regardless of which partner they obey, the other will be miffed.  Employees can’t win.

The obvious solution to this nightmare is to avoid it in the first place by ensuring that a comprehensive succession plan is crafted when the business is formed.  But what do you do when there is no succession plan and frustrations are growing?  

Before addressing that question, perhaps it is useful to clarify what a succession plan or succession planning is and its application to the situation described above.  Succession planning can have broad or narrow application as evidenced by a quick search of the internet.  In its broadest sense, succession planning includes preparing for the unexpected by identifying key management, supervisory and general workforce personnel who are critical to the daily operation of the business and identifying others that could step into the position with minimal disruption to the organization.  It can be very intense and include review of the company’s long-range strategies, identifying the talent pool that would be required to accomplish those strategies and grooming those individuals to step into positions of leadership or management in the future.   (http://en.wikipedia.org/wiki/Succession_planning)

In a more narrow sense and the application intended for this article, is that succession planning is the formalization of a plan that specifies what will transpire should either something happen to one of the owners or one simply wants out.  Such a plan would specify how the ownership of the business is transferred, provide specific instructions as to how the business would be valued and include provisions to purchase the share of the business from an estate or departing partner.  This article focuses on the departure of one or more of the business partners.

So back to the question, what do you do when a partner simply wants out and no succession plan exists?  The first thing to grasp is that it probably will be a long, painful process.  Without a plan, each step of the journey will be subject to negotiation and very likely dependent on how bad you want out and your partners want you out.  Let’s walk through a likely sequence of events.

•       You announce to your partners that you want out.  If your partners react positively, progression to the next step should be easy.  If one or more react negatively, words are likely to be exchanged and feelings hurt.  It may take awhile for the emotions to settle down before a rational conversation can occur. 

•       You have a discussion with the remaining owners regarding the timing and conditions under which you will exit the business.  Are there things at the business that will go with you - items that you would consider personal possessions?  Do your partners agree that they are personal possessions?  Did you ever transfer the item(s) to the business?

•       What is the planned date for your final exit?  What will be your work schedule until your exit date and how will you be compensated?  Will you be expected to train your replacement before your exit date?  What is your partners’ expectation of your continued contribution to business operations? 

•       Do you have property that currently belongs the company?  Will it be returned or transferred to you?  Computers, cell phones, and company cars are examples of items that are often provided by the company.  Are your partners in agreement which your expectations?

•       Did the company purchase disability or life insurance on you?  Will that insurance be passed to you - with the accompanying premiums?  Might it be converted to a lesser value policy without having to initiate a new policy with the associated hassle of physicals, underwriting approval, etc? 

•       Ultimately you will have to come to agreement on the amount that your partners will pay you for your share of the business.  There is a good chance that you will want a higher amount than they desire to pay.  This can be the contentious part of the entire negotiation as those remaining will be resistant to the taking on of debt to buy you out.

•       Ultimately you will have to come to an agreement as to how the business will be valued.  Finding an appraiser that you and the remaining partners can agree on may be another controversial discussion as you will want someone who tends to appraise high and your partners will want someone who tends to appraise low.  

•       Once you agree upon the appraiser, don’t be surprised if the question comes up, who is going to pay for the appraisal? Business appraisals are not inexpensive.  Once again, the remaining partners may be hesitant to spring for the cost.  After all, the appraisal is of no value to the operation of the business - it won’t increase revenues but it will increase costs.

Completion of the above actions should enable you to work your way toward the exit.  As previously mentioned, absent a previously negotiated succession plan means that each step will be subject to negotiations involving all the partners.  Count on it being slow and painful.  Sound like fun?  Wouldn’t you rather avoid regrets by taking preemptive action to negotiate and agree upon a succession plan before you need it?