By Norman A. Pappas
The most fundamental and difficult succession planning decision a business owner must make is choosing a successor.
Choosing a successor is a complex, emotionally charged decision. For most business owners, your company represents something very important and personal: years of hard work, the embodiment of your success, the symbol of your achievement. It also represents financial success, the “golden goose” that has provided for you, your family and your employees.
Because it is so important and personal, it may be hard to imagine the company continuing without you and the thought of someone else in control hard to contemplate. Thus, the most important step in succession planning occurs when you make the psychological resolution to let go. More than one business has failed when a “retired” owner returned to “straighten things out,” or undermined the successor whose decisions conflicted with his/her own. Successors need to be given the opportunity to try, and occasionally fail, in order to learn and gain the confidence and experience needed to succeed.
Instead of thinking about your departure as a loss (of the business, income, self-esteem, or purpose), think of it as an opportunity to have time to explore other interests. If you desire a longer transition, seek a role in the company as a consultant, being certain to respect the new lines of responsibility and authority you have created.
Passing a business on to the next generation is an opportunity to leave something of value that will endure beyond your own lifetime. It not only leaves a valuable asset that provides security and opportunity for future generations, it provides a legacy of your own personal values. The business is a symbol of your hard work, persistence, sacrifice and dedication. Your successors inherit not only the business itself, but also the philosophy and values that are its foundation, values that will guide them into the future.
When considering who will be your successor, the choice may appear to be obvious: your children, if a family owned business; a key employee, if a closely held business. However, the decision is not necessarily clear cut.
There are two separate but equally important issues to consider:
-¢ Who will operate the business? As you know, running a business is a complicated task, requiring knowledge, experience, energy, organization and dedication. Who is best suited for this task? Who has the management skills, financial acumen and market savvy to lead the company forward to continued success?
-¢ Who will own the business? Your company represents a significant economic asset. The inherent value of the company, combined with its potential to provide future income (through revenues, dividends, rents, etc.), makes it a valuable legacy to pass on. Who should receive the economic benefits of ownership?
In the simplest situation, your successor will be capable of both owning and operating the business. Perhaps you have a son or daughter working in the company who has been groomed to take control. Perhaps you have arranged to sell the business to a loyal, long-time employee, or group of employees, with the skills required to own and operate a business. Either way, you will pass on a valuable asset to your successor, receive a fair value for your business, and be secure in the knowledge that your business is in competent hands.
However, not all situations are so simple. In the next article, we will discuss the issues involved in deciding who should run, and who will inherit, the business.
Norman Pappas is president and founder of Pappas Financial and the author of several articles on business and estate planning topics. His book, Passing the Bucks, is a guide to business succession and wealth transfer planning. He can be reached at [email protected]