Planning for Succession, Part 2: Techniques & The Path to Success
In Part 1 of our series on Succession Planning, we highlighted the key elements of a succession plan and why it is so important for business owners to implement one. In Part 2 below, we explore various succession techniques and the path to success in preparing for succession.
Succession planning should be rooted in an evaluation of the abilities and desires of those family members who are potentially in line for succession. Future family heirs will need education, training and business experience. Some heirs may not be interested in participating directly or may not have skills conducive to the family’s needs in this area. In some cases, extenuating circumstances (e.g., health issues, conflicting commitments, et al.) may also complicate having certain individuals directly involved in the succession plan. Ultimately, some heirs may have active involvement while others have passive involvement — such as participating on the board but not engaging in day-to-day activities — so thorough planning and preparation are crucial.
Training and education for succession are key components of a sound plan and enable heirs to develop increasing levels of responsibility. These practices also limit overall risk to the family wealth enterprise by entrusting a specific set of duties to an heir, so they can demonstrate full competency before expanding the scope further. One way, for example, of enabling a family member to obtain this education is by completing an internship at the family business and then taking a position at another organization for a period of time prior to rejoining the family’s business in a permanent role.
Younger family members can benefit from preparation for board positions as well, which includes receiving mentorship and formal board training. There are also benefits to outlining specific requirements for board participation. From a business standpoint, these steps could be comparable to the process for promoting an employee within the company, and heirs should be prepared to demonstrate a similar level of competence and accountability.
Critical Considerations for Ownership Transitions
Across all three circles of participation in the family wealth enterprise, there are four critical considerations to weigh carefully when transitioning ownership: communicating effectively, ensuring the proper fit, remaining flexible and establishing a new role for senior generations.
Overall, transparency regarding the plan and process helps to increase preparation and avoid conflict. Where necessary, communication can still be restricted on a need-to-know basis. From a timing perspective, different groups of stakeholders will need to be informed about relevant information depending on how aspects of the succession plan affect that group. These stakeholder groups may include family members, direct succession contenders and extend to key employees, crucial third-party professionals and the general public. The communication strategy must account for the perceptions and reactions that could result. Effective communication and planning can minimize the potential for confusion or resentment. Especially within the family, soliciting input and acknowledging everyone’s viewpoints will help build consensus and prevent simmering discontent.
Ultimately, the most important factor is to select a successor who fits well in the role. While there is no definitive list of characteristics that describe an ideal successor, it’s best to have a combination of relevant experience, business acumen and emotional intelligence. These qualities help a successor address an array of challenges and build trust with key stakeholders.
The ideal leadership traits must be rooted in the family’s shared values, and they can include:
- Humility: Know what you don’t know and be willing to listen and learn.
- Accountability: Take responsibility for your decisions and hold others accountable.
- Maturity: Regardless of age, exercise good judgment and act in the best interests of the family and business.
- Integrity: Act in accordance with the family values, especially for difficult decisions.
- Diligence: Work hard, be engaged and lead by example.
- Cohesion: Be a good teammate, encourage collaboration and foster a shared culture.
As with any plan, flexibility is an important consideration. Remaining responsive to shifting circumstances or unexpected changes should be worked into the overall succession plan. For example, the person chosen as a successor may not be able to fill the role as expected for a range of reasons, such as an unforeseen change in personal obligations or health status. Scenario planning is an important aspect of preparing for a range of contingencies and responding accordingly.
Another critical aspect of planning is mapping out the new role for members of the older generation. They have significant knowledge to impart and are accustomed to holding influential positions, so a natural fit for them could be a board chair or head of the family foundation, or both, if applicable. Correlated concerns include identifying any challenges and mitigating fear or resentment, which can come from internal conflict or frustration over a loss of control after decades of leadership. An outside facilitator who specializes in family dynamics can help identify and navigate these concerns in a constructive manner to ease the transition. It’s best to address such conflicts as soon as possible to avoid intervention after the transition.
|MFA Observations: Involuntary Succession — Preparing for the Unexpected
Unfortunately, some successions are not voluntary. Because there are many different considerations to weigh and significant planning required for a voluntary succession, the process can stall or hit a roadblock. This exposes the organization to greater risk, so it behooves all key stakeholders to make adequate preparations and guard against an involuntary succession, which could be caused by death, disability, the unanticipated sale of the business or other unexpected factors. Thorough preparation and scenario planning help alleviate the effects of an involuntary succession and maintain resilience during unforeseen occurrences.
The Path to Success
Succession will happen, so it’s important to plan accordingly — and well in advance — to achieve the desired outcome and maintain the family wealth enterprise, if that is the path forward you desire. The plan should outline specific measures to educate heirs and have them gain experience with finances, leadership and decision making. Each type of succession across the family, business and ownership circles also needs to have its own distinct plan to ensure success, in combination with assessing the right fit for the role and communicating about this effectively.
Adaptability is a key aspect of succession planning, allowing the organization to adjust to unexpected occurrences without significant disruption. Ensuring members of the older generation have a new role to transition into, so that they can impart the value of their wisdom and experience can help to enable a smooth transition. Taking this proactive approach to succession planning positions the family, ownership and business for continued success, which will safeguard the family legacy for generations to come.
If you’re ready to start thinking about succession planning for your business, connect with The MFA Companies team to get started.
Material discussed in this communication is meant to provide general information and should not be acted on without obtaining professional advice tailored to you or your company’s individual and specific needs. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This information is for general guidance only and is not a substitute for professional advice.
The information contained herein should not be construed as personalized investment advice. Investment in securities involves the risk of loss, and past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this document will come to pass. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that your portfolio will match or outperform any particular benchmark.
Information presented was obtained from sources deemed qualified and reliable; however, MFA makes no representations as to accuracy, completeness, suitability, or validity of any information within this communication and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any forward-looking statements are believed to be reasonable; however, MFA gives no assurance that such expectations will prove to be correct.