How To Create a Successful Business Succession Plan - Phase 2

How To Create a Successful Business Succession Plan - Phase 2

June 05, 2019

Running a business is so easy, fun, and glamorous right?

Well, it can be all those things but mostly it’s hard work. Planning beyond the day-to-day or week-to-week urgent and important tasks can be nearly impossible. However, it’s crucial that owners spend time on the business, not just time in the business as Michael Gerber so eloquently put it in his seminal book “The E-Myth Revisited”1.

This post is co-written with Isaac Zipp, a partner at Sacramento accounting firm BFBA. They are a firm known for their expertise in helping owners create and implement business succession plans. Isaac works directly with small to mid-sized businesses helping them achieve their overall business and financial goals.

In a previous post, we detailed Phase 1, which is the defensive side of effective business succession planning. You can read it here, but I’ll quickly summarize the main points because they directly lead into Phase 2 – the offensive planning.

  • Identify your key people. One or more of them are your likely successors.
  • Value the business. You can’t make a proper plan without knowing the value of your asset.
  • Implement a Plan to protect the business from the loss of an active owner or key employee

Once a strong defense is in place, it’s time to create a plan to focus on maximizing the value of the business either for an internal sale or to an outside suiter. Even if you don’t ultimately sell the business, by following these steps you will create a fantastic business that can perform at a high level, even without you there.

Letting Go

You’ve built it. You own it. You’re the master of the universe. I get it.

In order to develop and implement a succession plan, you’ll need to set aside your ego, let go of certain responsibilities, and understand that someone in your organization may actually be better at executing particular functions of the business than you are.

In the book “Rocket Fuel: The One Essential Combination That Will Get You More of What You Want from Your Business”, Gino Wickman and Mark Winters argue that the most successful businesses in history – think Apple, Disney, Microsoft, and Ford, - were built by two distinct personalities.

The visionary is most often the founder of the business with the BIG ideas. Somehow this person can see around corners and position the firm to deliver value to the market in a way no one else can. The visionary drives the growth of the business and generally manages key customer and supplier relationships.

The integrator is the unique individual that can make a visionary’s dream come true. This is the person in the organization that fulfills the promises made by the company to its customers and stakeholders. Integrators “make sure the trains run on time.”

While each can be successful without the other, it is this combination of talents within the same organization that leads to explosive, exponential growth. If you’re a visionary, have you identified your integrator, and have you truly turned over major operational responsibilities to this amazing person? If you’re a natural integrator, is there someone in your organization that is driving growth while managing and nurturing crucial relationships? Who are the key employees that support these roles?

Set them up to succeed by giving more responsibility – and then get out of the way. It doesn’t have to be sink or swim, but you’ll know in a short period of time if you’ve got the right people in the right seats on the bus.

Share the Wealth

For most businesses, their greatest asset is their human capital and that makes implementing financial incentives vital to keeping your people happy and engaged.

Beyond traditional bonuses, group health, and group disability insurance plans, employers must turn their attention to creative benefit plans.

  • 401(k) and Profit-Sharing Plans provide a company’s eligible employees the ability to defer a portion of their income into a tax-deferred retirement account. Owners have the option to match contributions up to a specified amount, with the most common match among small businesses being 3-4% of an employee’s compensation. The profit-sharing component is an optional additional contribution that is only determined annually. In a big year for the business, owners can elect to defer profits (and taxes) for themselves and their employees. In a ho-hum year, the business can elect not to make a profit-sharing contribution. With unemployment low and demand for exceptional workers high, this type of benefit can be essential to keeping your best people. 
  • Select Non-Qualified Deferred Compensation Plans allows owners to target key people without the need to provide a benefit for all employees. These plans come in many forms, giving owners the ability to set clear metrics for key people to achieve such as revenue growth, sales goals, profitability, or customer satisfaction. In lieu of paying a bonus directly to the key person for reaching their goal, the owner instead makes a promise to pay this additional compensation in the future. The amount of the future bonus can be based on a specific metric for the key employee, a percentage of the company’s overall profits for that year, or a combination of both. Some of these promises are short-term in nature. In one business, we have established a rolling 3-year deferred compensation program for several key people. Each year certain targets are achieved, the employer makes a promise to pay a specific dollar amount as compensation in the future. In this case, benefits earned today are paid out in 3 years. If the employee were to leave prior to the custom three-year vesting, they would forfeit that benefit.

Other deferrals are designed to supplement retirement income many years in the future. Another company we work with allows key executives to defer their own income above and beyond the 401(k) plan while also adding company money which will be made available at the executive’s age 62.

Unlike the rigid structure of a 401(k)/Profit-Sharing Plan, you can see that both the timing of payouts and vesting can be fully customizabl

Both of these methods provide targeted team members with “skin in the game” by compensating them for achieving certain targets while the owner still maintains some control over the benefit. In addition to financially incentivizing the key employees, these plans also increase employee retention, providing the employer with more comfort in times when the labor market is tight.

Aligning compensation with behavior will engender loyal and productive team members. Imagine the impact on growth and profitability with key members of your team focused on vital outcomes and being compensated commensurately.

Clean it Up

Now that you have the right people doing the right things and you’ve aligned compensation, it’s time to maximize enterprise value by analyzing the revenue and expenses of the business. While many businesses strive only for revenue growth, we’ve found incredible value in simply cleaning up the profit and loss statement and finding ways to maximize the profit.

When a business is in growth mode, owners are often focused on increasing the “top line” by adding to gross revenue. During this phase, the company is constantly spending with the intent of investing in the future of the business. After several years without close controls, however, businesses can fall into the trap of having piled on expenses they may no longer need.

Has the company benchmarked its suppliers’ prices recently? Is each division or location that was added to facilitate growth performing adequately? Perhaps growth has leveled off, but the business has hired 5 people whose job can now be largely assumed by other quality employees who have capacity? Do we need as much commercial space to generate the same revenue and customer experience?

Can you imagine increasing profit by 5% or 10% without any increase in revenue, additional liability, or complication that comes with sales growth? A strong, experienced team of advisors will help you take a fresh look, analyze expenses, and margins to provide feedback from the experience gained by working with similar firms over many years.

You’re READY

Regardless of the size of your business, with these steps in place you will undoubtedly grow the value of the business, increase happiness, and find more free time. With a well-implemented succession plan, your key people will want to step into the ownership role. Even if they ultimately choose not to, an outside firm will find tremendous value in the systems you’ve created and are more likely to write a large check to take over your thriving business.

Who knows, if you do a good enough job implementing these strategies you may not want to sell after all?

Happy Planning,

Brian and Isaac

Further reading and citations:

1. The E-Myth Revisited – Michael Gerber