Succession planning is a process that doesn’t begin one day and end the next; it is a process best handled over the long term.
There are two fundamental decisions that form the foundation of succession planning: management succession and ownership succession. Both are very different and do not need to involve the same parties in the ultimate solution. Both are, however, intertwined, since all parties will be required to work together to achieve a successful transition.
Your supply agreements, franchise agreements and other agreements might contain succession criteria and requirements, but our experience shows that most do not. Many agreements deal with management approval and many are silent or vague when it comes to ownership transition.
Management succession involves many components. Typically a management successor, either within the family or a key employee, is identified. This person must be fully trained in the business, agree with its philosophies and be groomed to eventually run the business.
They must obviously understand the business, but more importantly understand the customers and have strong relationships with key suppliers and employees. This takes time.
Performance criteria are usually established, and the key employee’s performance is measured against such criteria in order to identify any areas where improvement is required and areas where excellent performance exists.
You as the current owner move into the mentor and coaching role, working with your successor to teach him the ropes and to show your support. Your words of encouragement and criticism become ultimately important. Through your actions you set the mood within the organization, with suppliers, customers and employees. As weaknesses are identified in your successor’s skill set, you ensure those weaknesses are addressed either through formal education programs, peer programs or association education programs. On-the-job experience is by far the best form of training, followed closely by formal education to fill in the blanks identified in your successor’s skill set.
Ownership succession, on the other hand, involves decisions as to who will own the shares, how non-family members will be treated from a equity standpoint, and who controls the business until you are ready to give up control. If your business operates under a franchise, supply or other agreement, you likely will be required to gain approval for your ownership plan with the franchisor.
Usually, as long as approved management is in place, you and your family can retain ownership for as long as this makes sense. Often, you will be asked to grant first right of refusal to the manager successor, since ultimately the franchisor will want your successor to also have equity participation.
From a financial standpoint, your parts business is likely the most significant asset you own, and one that must continue to provide you and your family with cash flow in your retirement years. In many instances, your successful business can still provide you with personal cash flow in the form of dividends or consulting or management contracts.
In cases where the cash flow is not sufficient to support both your family and that of the management successor’s, then an acceptable decision that puts you in the best possible no-risk position is to sell your business to your management successor. In this case, the after-tax investment capital created on the sale of your parts business will provide you with an investment return, thus providing you with the cash flow needed to retire.
It is difficult to cover such a complex issue completely. Each person reading this article will have a unique situation that will require a customized plan. In the end, however, your decisions will fall into both the management category and the ownership one.
A plan that does not deal with both is not complete.