Busting Three Popular Succession Planning Myths

As someone who has spent years helping business owners navigate the complexities of leadership and ownership transitions, I stay current with articles that advise on so called “exit” or “succession” planning. While many articles offer accurate, well-meaning advice, they often lean too technical and miss the practical realities. Recently, I’ve seen a wave of pieces that could mislead business owners. This blog aims to spotlight — and bust — some of the most persistent myths.

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

The first myth is that the goal of the exit planning process is to maximize the value of the business. Is that sometimes the goal of exit planning? Yes, it is, particularly when the exit is a sale to an outsider (someone who is not a family member and does not work for the company). But oftentimes the chosen exit plan — and the correct exit plan — does not maximize the value of the company. Sometimes, it’s to maximize the owner’s happiness.

It might sound unconventional, but business owners should build a succession team with one clear mission: Maximizing the owner’s happiness. That doesn’t always align with maximizing business value. For instance, selling to a competitor might yield the highest price, but leaving the business to children could bring greater personal fulfillment. Selling to loyal employees who helped build the company, or to a private equity firm that promises to preserve the leadership team, might also be more satisfying. Are these choices wrong? Only if value is the sole objective. But if the true goal is owner happiness, then they’re exactly right. A good planning team will invest hours in helping owners 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 Michaelangelo problem. What would a buyer pay for Michaelangelo’s sculpture studio? Not much, unless Michaelangelo (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 right minded, 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 Michaelangelo?  Owners have every right to shape a succession plan that reflects their own vision, not one imposed by the planning team. I have been brought in by several business owners to develop succession plans where the prior planning team was not listening to the owner’s wishes, hopes, dreams and desires on continuing to run the business.

So what is the solution? Owners need to understand one basic truth: Leadership and ownership will transition. It is called mortality; death is unbeaten. 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 whom ownership should transition to (family, insider or outsider) and who needs to be part of that transition team. The plan must describe each person’s role and what the team needs to do if and when the owner becomes sick or dies — thereby to transition ownership as efficiently and effectively as possible to 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 Michaelangelo.

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

The internet is replete with the advice to business owners that they should not separate ownership from leadership. These articles provide that if business-owner 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 wrong. It is indeed 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 one huge step way too far. I have worked with many successful family businesses, and many successful families, 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. There are issues of:

• Compensation
• Family governance
• Corporate governance
• Profit sharing and reinvestment

All this needs to be handled proactively, with a business-first mindset, rather than reactively and emotionally. But when the owner’s definition of happiness involves the business’ legacy as a family uniter, then that vision can become reality — with proper planning.

Conclusion

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 have that right team around you.

ABOUT THE AUTHOR

Joe Maier

SVP Director Wealth Strategy | Johnson Financial Group

As Senior Vice President, Director of Wealth Strategy, Joe is knowledgeable in helping clients with their business succession, financial and estate planning, and post-death administration needs. He has a breadth of experience serving family businesses and a deep understanding of wealth transfer strategies. Along with strong leadership and collaboration in corporate and private law practice environments, Joe is well-versed in working with family offices, business owners, and corporate executives to help them meet their wealth and legacy planning goals.