Published on November 13, 2016

Michael L. Chindamo

The succession planning process for family owned and owner- managed business (FOMB’s) requires four components and two related dimensions and then ten interdependent factors. 

Guidelines to traditional succession planning concepts adapted from The Horwath International Guide to Total Planning in the Family Owned and Owner Managed Business by James N. Bieneman, CPA and the International Succession Planning Association by Lloyd Rawls and Michael L. Chindamo, Founder, Fautores Family Offices. Michael Chindamo, in practice for more than 35 years is a licensed Certified Financial Planner Certificant®, Accredited Investment Fiduciary® and Certified Succession Planner®. 

The Five Critical Attributes to FOMB planning

The following are the traditional Family Owned and Owner Managed Business (FOMB) succession planning components.

The planning components are

1)     The owners plan

2)     The family plan

3)     The company or business entity plan(s)

4)     The succession plan

In addition, for each plan, there are two dimensions, the hard side, and the soft side.

Hard side issues address:

  • Economic and Tax Planning
  • Wealth Preservation
  • Wealth Transfer
  • Charitable Gifts
  • Life Insurance
  • Business Evaluations
  • Business structure
  • Investment Portfolio

Soft side issues address

  • Board of Directors
  • Family Council
  • Compensation
  • Shareholder Agreements
  • Roles
  • Job Descriptions
  • Governance
  • Fairness
  • Family Mission
  • Employment Rules
  • Leadership Transition
  • Communication
  • Conflict Management
  • Personal Goals

The Four Steps to FOMB Planning

Step 1 – The process begins by clarifying and analyzing the feasibility of the owner’s objectives.

Step 2 – Next, family members and minority owners begin to define their goals and initiate a planning and implementation process. Eventually, they develop a Family Plan.

Step 3 – When the owner’s plan and family goals are clarified and a course of direction begins to take shape, answers to basic questions emerge such as whether the owner(s) and family wish to keep the company (s) or sell it, whether there is an adequate system for family and owner communications and working together, and whether succession has been addressed. The answers to these and related questions dictate where to go next in the planning process, but usually, the answer is to develop or revise the Company Plan.

The Company Plan addresses how to capitalize on FOMB opportunities and shore up weaknesses in the company. The Company Plan also defines the impact on the company of meeting the owner’s and the family’s succession planning objectives.

Step 4 – The Succession Plan, is where all of the components of FOMB planning are integrated and really come together. The Succession Plan clarifies how the ownership and management of the company will be transferred, now or in the future, and how the senior generation will achieve financial security, preserve accumulated wealth, be fair to all owners and family members and still protect the FOMB.

*Steps 1, 2, 3 and 4 can be done separately, but it is better if they are done together.

Summary:

  • FOMB planning recognizes the goals of the company and of family members, whose interests are intermingled and whose futures are linked.
     
  • FOMB planning defines these goals, tests them for feasibility and reconciles conflict and differences
     
  • FOMB planning implements the best overall solutions that owners, families, and minority shareholders are able to create and recognizes that the plan that works best for all parties may not maximize the wealth of every party or achieve every goal.
     
  • FOMB planning improves business and personal relationships, career opportunities and the financial resources of owners and family members. It also enhances the company’s chances for success.
     
  • FOMB planning is a privilege as well as an obligation.
     
  • Some FOMB planning is better than none, and the best planning is comprehensive, incorporating considerations from both the economic or hard side and the personal or soft side.

Succession Success is based on ten interdependent factors as follows:

  • Owner motivation and perspective
     
  • Personal financial planning
     
  • Business Structuring
     
  • Business Performance
     
  • Strategic Planning
     
  • Leadership and Management Continuity
     
  • Successor Preparation
     
  • Management Synergy and Teamwork
     
  • Family Dynamics
     
  • Family Governance

The 4 key concepts that impact Owner Motivation and Perspective:

1)     Progression of Owner Motivations

2)     Stewardship Mentality

3)     Attitude of Humility

4)     Submission to teamwork

Key concepts for Personal Financial Planning relating to FOMB planning:

1)     Establishing a state-of-the-art, technically correct financial plan that facilitates business succession. This means that all core advisors have collaborated and agree that the plan is in compliance with various professional perspectives, which promotes advisor teamwork.

2)     Addressing common questions for establishing a circumstantially prudent financial plan that facilitates business succession.

Is the sale of the business realistic?

Is the retention of the business realistic?

Is there sufficient time and excess disposable income to achieve financial independence from the business?

Does the time or insufficient income dictate a hybrid plan of financial independence?

3)     Common questions for establishing a personally compatible financial plan that facilitates business succession.

a)     Does the business owner understand the plan?

b)     Can the business owner reasonably carry out the plan?

c)      If no to the above, how could the plan be achieved in a compatible manner?

*The controlling senior generation is not going to get serious about turning over business ownerships and management to their successors until they know that their personal financial security and continuity of the business is not in doubt.

Business Structuring

There are two fundamental components:

1)     Efficient tax and cash flow Business Structures with the appropriate command, control and liability features to support and facilitate the succession strategy.

2)     Effective, comprehensive and well thought out business documents detailing agreements that preclude future disagreements and negotiations.

*There is no Cookie Cutter program that effectively structures all businesses for the succession process.

Business Performance

Financial success is the fundamental predicate to succession. Therefore, succession planning must instill and/or affirm business performance that can generate the profits to sustain the business culture and fulfill reasonable financial goals through the next generation. The top three metrics are of business performance are:

1)     Market penetration

2)     Profitability

3)     Capitalization

*Working capital is the Life’s blood of a business that is essential for the continuation of success through the next generation of owners and managers. There are no short cuts to adequate working capital: working capital demands the discipline and sacrifice of owners to build “retained earnings”.

Strategic Planning

Succession planning is a fundamental business activity that actualizes the vision and confirms the direction of a business. As a foundational long-term strategic issue, the confirmation of a comprehensive succession strategy is a fundamental component of strategic planning. Strategic planning confirms operational strengths and weaknesses and evaluated resources relative to the achievement of priorities.

An integral component of strategic planning is the articulation, communication and coordination of a business strategy to all team members.

The 4 critical factors are:

1)     Strategic Thinking

2)     Tactical planning

3)     Long-range planning

4)     Follow up accountability

*The purpose of strategic planning is to achieve organizational alignment between goals, values, and resources

Leadership and Management Continuity

Business succession is not a solo endeavor. Family members, partners, shareholders, directors, distributors and franchisees rely upon competent, motivated and trusted managers to carry out the business mission. Much of the value of the business is in the resourcefulness, commitment, enthusiasm and teamwork of the management team that optimizes business resources for the achievement of business goals. Therefore, the development and constant regeneration of a management culture that can sustain and enhance historical success are imperative to a successful succession. *The identification, motivation and retention of highly qualified supporting managers and development of bench strength are essential to maintaining the viability of succession plans.

Management Synergy and Teamwork

Teamwork is a critical component of a successful succession. This requires one’s full collaborative team of advisors, key employees, vendors, managers, aspiring partner’s suppliers, vendors and about anyone else who is seriously involved.

*The basics of teamwork are, trust and the willingness to subordinate personal priorities for the achievement of a common vision.

Successor Identification & Preparation

Moving the family business to and through the next generation requires available, capable and committed successors. Many potential successors have problems because of unreasonable “heir to the throne” assumptions. The best successors have reasonable expectations for entry into the business based on a well-developed and customized plan for gaining progressively responsible and successful experience in the business. This career path helps them earn the respect of their key managers.

*There are three successor criteria:

1) Character

2) Commitment

3) Capacity

Family Dynamics

Family relationships can be an inherent advantage or disadvantage to succession planning. Effective interaction among the family members of current and /or prospective business owners is critical to achieving the unity and harmony needed to address the predictable complex business succession issues. Bickering among active or inactive family members can frustrate, distract, and weaken the focus and commitment of the leadership management team. Therefore, effective intra-family communication is essential to building and maintaining the relationships that preclude costly divisive behavior. Establishing forums and processes for effective intra-family communication provides the building blocks for a unified succession vision and collaborative efforts for the achievement of business succession goals.

*All family businesses are characterized by a tendency or dependency upon the infrastructure of family or business. Achievement and maintenance of a balance between family values and business expectations are very challenging. The successful family business is aware or their tendency or dependence and constantly works to achieve equilibrium.

Family Governance

Establishing the forums and processes for optimizing intra-family communication provides the building blocks for a unified succession vision and collaborative efforts for family governance structures that facilitate the achievement of business succession goals.

*Unreasonable expectations are a natural byproduct of the conflicting priorities of the Family Business Oxymoron.

* The development and adoption of a family Member Employment Policy fundamentally states that a family member’s employment is an opportunity, not an inalienable right.

Governance Mechanisms Critical for Enhancing Family Communication and Harmony

  • Informal Family Meetings
     
  • Family Business Councils
     
  • Family Business Employment Policy
     
  • Family Member Employment Expectations
     
  • Operating Covenants and Management Covenants
     
  • Shareholder Agreements and Estate Structures
     
  • Operating Board of Directors

Guidelines to traditional succession planning concepts adapted from The Horwath International Guide to Total Planning in the Family Owned and Owner Managed Business by James N. Bieneman, CPA and the International Succession Planning Association by Lloyd Rawls and Michael L. Chindamo, Founder, Fautores Family Offices.