At Meridian, we are still amazed at the number of companies without a documented leadership transition plan. While all of us may like to think we’re immortal, the cold, hard truth is that we aren’t, and we don’t get to pick which day is our last. So, let’s proceed with positive plans to keep any company viable after a tragic, unforeseen death.
First, it’s important to separate the concepts of ownership from management. Although they likely are one in the same presently at your company, they don’t necessarily need to be in the future. So, let’s put the issue of ownership on the back burner and only identify the best people to run your company.
Using an organizational chart, identify all your key managers. A successful leadership transition plan needs to deal with each of the vital positions, not just the owner. Consider for each key position identified, if that person were incapacitated or passed away, how would their tasks be handled?
There are usually only two answers to this question — through an outside replacement, or through someone already within your company. If you don’t want to hire from outside, or think it would be too time-consuming and difficult, you most likely will immediately discover your company has completely ignored cross-training at the upper management level.
If so, you are not alone in this discovery. Because of the tremendous time pressures on upper management, plus a little territorial turf protection, cross-training is rarely done at most companies. If you plan to cover a vital position from current staff, however, you need to stop with the excuses and begin cross-training immediately.
For each key position, identify the logical number one back-up and ideally one other reserve back-up individual from within the corporation. If documentation of each key position has not yet been done, enlist the help of these key individuals to document the tasks and procedures of their own positions.
Realistically, you may find most upper management folks would rather have a root canal than document their activities, but if what they do is truly critical to the company, documentation must occur. This can even be done during the cross-training process with the person being cross-trained actually creating the position manual as they go.
If you find that you cannot cover key positions with existing inside personnel, then identify specific potential outside candidates. For instance, an owner without anyone ready and available to run his company may know competent, management-level industry friends at other companies that would relish the idea of running their own company. These people should be clearly identified in the leadership transition plan. Ideally, approach these folks ahead of time with your idea. They will typically be flattered at your confidence in them. Conversely, if they would have no interest in filling your shoes, it’s good to know that fact ahead of time so you can move on to the next candidate.
If you must hire from the outside, and if hiring that person could cause some financial strain to your company, consider life insurance to help offset the costs. It can be wise to insure your entire upper-management team. Tax code regarding life insurance premiums and proceeds is a moving target, however, so be sure to bring your CPA and life insurance professional into your planning process.
With each of your key management positions having at least one back-up identified and cross-training finished, the bulk of your succession planning is actually done. We haven’t even talked about ownership yet! See how putting the issue of ownership on the back-burner helped you sort out the management issues much more efficiently?
So now you are stuck with who should own your company. Thanks to Limited Liability Companies, however, we can now even separate voting from non-voting shareholders. If you have heirs who you would like to have ownership, but not voting rights in the company, an LLC will allow you this needed flexibility.
As you divvy up ownership, stay mindful of how voting could occur including any stalemates. If you have two children you intend to leave the company to, and you split the company up 50/50 to be fair to both kids, you would have a no-win position.
If you don’t have heirs, should you give the company to your key employees? Maybe, but maybe not! Consider the financial impact on them, being especially mindful of any financial burdens such a transfer of debt. They may not be thrilled with your gift of ownership if they can’t make the payments. If your company is struggling with cash flow and debt under your management now, you would not be doing your employees any favors by leaving them the company.
You may wish for your company to be sold to a specific outside party upon death. If so, execute an agreement now which specifies how the price will be determined, the terms of the sale, and the distribution of the proceeds.
Want to leave the company to a non-family member, but still want your family comfortable and taken care of properly after your passing? Then you need life insurance and some frank discussion with your family about what you are doing. This is where a third-party arbitrator can come in handy. Many professional arbitrators, attorneys and estate life insurance specialists are trained and skilled in helping you handle these delicate situations, keeping close family ties intact while doing what is right for your business and employees.
Leadership transition planning is the number one, most frequently postponed, vital business component. Force yourself to get started today. Make your list of key managers, then schedule a meeting with those managers to discuss succession. When that’s done, progress on to ownership. There will be the reward of a tremendous sense of relief, pride and comfort waiting for you when you complete the process. And your family and employees will be grateful.
