Busting Three Popular Succession Planning Myths

This is part of an ongoing series of articles about estate planning and succession planning, written by Joe Maier, JD, CPA, Senior Vice President, Director of Wealth Strategy

Given my experience and passion helping business owners craft and execute leadership and ownership transition plans, I am an avid reader of articles that advise on “exit” or “succession” planning. Most of these articles are more technical than practical but generally provide accurate information and well-intentioned advice. Recently, however, I have read a spate of articles that risk leading business owners astray. The goal of this post is to highlight and then bust some popular yet ill-conceived myths.

Myth 1: The Goal of Exit Planning is to Maximize the Value of a Business

Is that sometimes the goal of exit planning? Yes it is, particularly when the exit strategy is a sale to an outsider (someone who is not a family member and does not work for the company). But oftentimes the correct exit plan does not maximize the value of the company.

So what is the goal of the exit planning process? This may sound like new age thinking, but, in fact, business owners should have a succession team whose sole goal is to maximize the owner’s happiness. For example, the value of the business might be highest if sold to a competitor, but the owner’s happiness may be maximized by leaving the business to the children, selling to a couple of key employees who have helped the owner achieve long-term economic success, or possibly by selling to a private equity buyer who has agreed to keep the leadership team intact. Are these strategies wrong? Not if the focus is where it should be: maximizing the owner’s happiness. A good planning team will invest time helping the owner uncover their wishes, hopes, dreams and desires, and then build an exit plan designed to achieve them.

Myth 2: The Owner Needs to Transition Leadership

Many articles advise that an owner needs to transition leadership before transitioning ownership. These articles rightly advise that there is an inverse relationship between the value of the owner to the business and the value of the business to the owner. I call this the Michelangelo problem. What would a buyer pay for Michelangelo’s sculpture studio? Not much, unless Michelangelo (at a reasonable, profitable salary) comes with it. Stated another way, if the business is just the owner, ownership transition is impossible.

So if that advice is rightminded, why is this a myth? Because it once again assumes that maximizing value is the owner’s goal. What if the owner’s happiness is maximized by continuing to be Michelangelo? Owners have every right to build their own plan – not the planning team’s. I have been brought in by several business owners to develop succession plans where the prior planners were not listening to the owner’s desire to continue to run the business.

So what is the solution? Owners need to understand one basic truth: leadership and ownership will eventually transition. It is called mortality. The key is helping the owner understand that the older he or she becomes, the greater the risk of transition by death, disease or disability.

Therefore, if the plan is to continue to own and lead, the more critical it is to document and communicate what leadership and ownership succession look like if the owner becomes sick or dies. The plan needs to have painstaking detail on who ownership should transition to (family, insider, outsider), who needs to be part of that transition team, what each person’s role is and what the team needs to do if and when the owner becomes sick or dies. This will ensure an efficient, effective transition of ownership that will best protect the business, the family and the employees. Stated another way, there needs to be a thoughtful, detailed ownership transition playbook in place for any and all owners who continue to be Michelangelo.

Myth 3: The Business Will Not Succeed if Owned by Involved and Uninvolved Children

The internet is replete with advice to business owners that they should not separate ownership from leadership. These articles provide that if owning parents want to keep the business in the family, and some of the children are involved in the business and some are not, then leaving the business to all of the children will result in business and family failure.

The reason this is a myth is not that the warning is entirely wrong. It is risky to leave ownership of a business to any people with misaligned goals. The involved children generally have “pride of authorship.” They know the stakeholders, they crafted the strategy, they are making the decisions. They tend to be focused on the long-term success of the business. Uninvolved children often care little about these things; it is likely they had a choice to be a part of the business and declined. They tend to look at the business not as an emotional asset (one they care about regardless of value) but rather as a financial asset (one they care about solely due to its value), like any other stock or bond. Combine that mindset mismatch with the emotional baggage of growing up in the same household, and there is a recipe for potential disaster. The warning of a potential storm is real and should be carefully heeded.

So why is this well-intentioned advice a myth? Because these articles are not positioning this problem as a planning issue that needs to be addressed, but as an absolute destroyer of business value and family unity. And that is a step way too far. I have worked with many successful family businesses where involved and uninvolved family members benefit from the financial and emotional rewards of owning a multi-generational business. Again, in these situations, the planning is complex, involved and long-term. Issues of compensation, family governance, corporate governance, profit sharing and reinvestment need to be handled proactively with a business-first mindset, rather than reactively and emotionally. When the owner’s definition of happiness involves the business’ legacy as a family uniter, that vision can become reality.

In Sum

For business owners, here is the truth. Leadership of your business will transition. Ownership of your business will transition. You need to plan for those transitions in a way that will make you as happy and fulfilled as possible. You need a team that can help you uncover what makes you happy, understand the role of the business in your wishes, hopes, dreams and desires, and then build a plan designed to achieve your goals. A strong succession team will not bring platitudes or common wisdom (i.e., myths) to the planning table. They will bring uncommon wisdom – a combination of experience, empathy and problem-solving skills. Make sure you surround yourself with the right team.

ABOUT THE AUTHOR

Joe Maier

SVP Director Wealth Strategy JD, CPA | Johnson Financial Group

Joe has extensive experience helping high‐net worth individuals, family offices, business owners and corporate executives meet their wealth and legacy goals. His areas of specific interest and skill include business succession planning, financial and estate planning, and wealth transfer strategies.