Succession Planning

A closely held corporation needs a succession plan just as much as any other type of business. Stockholders and executives of a closely held corporation are usually the same. Unlike a partnership, when a shareholder dies, the company continues its independent legal existence. The deceased stockholder’s shares are passed to his/hers estate or heirs. If no plans have been made for the sale of stock or a management change, the death or retirement of a stockholder could cause a host of problems for the business, the surviving shareholders, and the heirs.

If the surviving shareholders own a majority of the stock, control of the business will not be affected. However, the company may sustain financial losses when the expertise of a key manager is lost. In addition, the heirs of a minority stockholder may complicate business affairs since heirs have the right to vote and demand information about the management and finances of the company.

These are just some possibilities a company may face if it is stranded without leadership in the major functional areas. Consequences are severe, so any business must have a succession plan.

Your decision about who will take over your business when you leave will be one of the most important decisions of your career. It could mean the difference between the collapse of your business or its continuing success after you retire. This is a decision that calls for careful planning. You will need to make decisions about insurance, buy-sell agreement, your will, and other matters that affect how your business will continue.

The family-owned business is an increasingly attractive career choice for the children of business owners, even when more than one child joins the firm. Consequently, more families than ever intend to pass on their company’s leadership to many offspring.

The first step in determining a child’s interest in the firm is to ASK. Ask if they would be interested in running your business after you retire. You could then plan to leave the majority interest in your company to this child in your will, as suggested by an attorney who handles family business cases. Other tangible assets like real estate could be left to your other children.

If you want to pass on your business to your child, you must be as objective as possible about their abilities to manage the business successfully. If the child seems to lack the competence to run the business, consider hiring a professional manager either permanently or on an interim basis while your child prepares for the top job

Find both family members and others as potential successors. Be as objective when you hire and promote relatives as you are when you manage and engage others. Use written job descriptions to guide your thinking when considering the talents and limitations of possible successors. Give positions and salaries to family members according to the company’s needs and your relative’s abilities. Try to avoid preferential decisions and wages that favour relatives over other employees. Performance still needs to be the main criterion for success in your business.

Cultivate your heirs. They can work up the company ladder and be promoted on their merits and performances.

In a family-run business, the owner generally “wears” many hats, including those of the general manager, chief financial officer and even the cleaner. Decision-making is centralised through the group of executives. Top management bears most of the responsibility and may have difficulty delegating authority. Moreover, because “working Managing Directors/Owners” often link their identity and self-esteem to the business, they find it hard to think of retiring and relinquishing control.

You need time to train your successor and strengthen your management team and operations; you need to start now and prepare a plan before a crisis.

Planning for management changes is an essential part of your SUCCESSFUL future. First, it is getting the old boy out. “The Old Boy” is the owner or founder of the business and is unwilling to retire because his life is centred on the firm. Perpetuating a family business is the ultimate management challenge. You can increase your chances of success if you believe that succession is a process that may take years to complete.