Helping Clients Find The Right Successor

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If you have dealt in the small business market at all, you have undoubtedly come across the situation where a business owner has failed to develop a succession plan and then becomes disabled or dies.

The hazards of failing to plan are many and serious: a lack of funds for a successful buyout of company stock; an unqualified family member or partner stepping up to run the business; or ending up with a successor who really doesnt want the job.

Business owners can avoid these traps, but theyre usually so busy with day-to-day affairs that someone else has to raise the difficult questions about the future of the business.

“I think insurance agents are well positionedtheyre probably the most people-oriented advisor,” says John Oliver, vice president of strategic marketing services for Transamerica, Los Angeles. Oliver notes that of all the business owners advisorsaccountants, attorneys and financial advisorsits easier for the insurance professional to broach the issue of succession planning.

“Asking the question in the first place, How are you dealing with the need to have a successor? puts the advisor in the strongest position possible,” says Kirk Rogg, senior vice president of AON Talent Consulting Group, Kansas City, Mo.

Some of the questions that need to be asked are whether or not a current succession plan is in place, when was it developed, has it been reviewed, what are the triggering events, who is the future successor and will that successor be prepared to take over when the time comes.

Oliver describes some common scenarios he has seen in businesses. “We hear it all the time, someone has a buy-sell plan, but its never been funded; someone has a buy-sell plan, but they never did a valuation; someone is getting divorced and they never did the spousal planning with the business. A lot of succession plans fail because they were never completely done.”

Some of the issues business owners face when developing a succession plan can be solved with insurance productsspecifically, life insurance and disability coverage. But developing a complete succession plan is much more than drawing up a legal document, issuing insurance policies and valuing the company. The issues of retirement or of an owner just looking to get out of the business must also be addressed.

Industry experts agree that one of the first steps business owners must take when considering the development of a succession plan is identifying who the successor will be and whether that individual is ready and willing to take over. If the selected individual is not prepared, it could take years to train him or her to run the business successfully.

“A lot of times, what entrepreneurs do is they create a job that only they can do,” says Rogg. “So, when theyre looking for a successor, the only person who can do that job is them.”

Terrance Kral has seen this in his practice as he works with business owners. Business owners who are successful and have run their business for several years have done every job in the companyfrom sales and marketing to accounting and customer service, says Kral, who is a partner with Kral, Goodenough & Kral, Inverness, Ill. “Now, when the business owner picks a successor, how long will it take for the successor to be able to do all these things?”

To solve this problem, the business owner must think about his role in the company and determine exactly what the successors job should be, explains Rogg. “That requires the business owner to think about the position, the profile or tasks and activities that need to be done, and the skills and competencies that are required to be successful,” he says.

This usually results in the business owner delegating more tasks to members of the management team. Once the position has been redesigned so that someone other than the owner can do it, a successor must be found and groomed for that role. The grooming process, Rogg adds, can take several years.

“Its important for people to understand you cant train someone to be a good leader or CEOthat is born out of experience,” explains Rogg. “And since its born out of experience it takes timeyou cant start it 3 months before you need somebody ready to step into that role,” he says.

Kral agrees. In one situation in which Kral was involved, his business owner client had 2 sons and a key executive who would be taking over his business. While all 3 would own the business, one of the sons was being groomed to be the president of the company. “For a 10-year period of time, he went through the grooming process,” he says.

During these 10 years, the business owner brought his successor into meetings with the companys accountants, attorneys, benefit planners, vendors and suppliers. “It can take years for all that information to sink in,” he says.

But once a potential successor starts the grooming process, its not a guarantee for success. The successor may not meet the standards set by the business owner, or the successor may realize that he or she is just not interested in taking over the business.

“Youve got to manage your companys talent so you have a succession plan, not a replacement plan,” says Rogg.

In another situation Kral encountered, his business owner client was in the process of grooming his son to take over the business. The son was learning the business and things were going well, when there suddenly was a conflict within the family. “The son who was being groomed chose to the leave the business,” says Kral. “It was a shocktrying to unwind these things can be very difficult.”

An issue that needs to be addressed when working with businesses with multiple owners, is what to do with the business in the event one of the owners “just wants out,” says Oliver.

“How many partners can maintain a partnership relationship for 20 or 30 years?” he asks. “Sometimes they can and thats great, but a well-drafted plan will address if someone is just sick of it and wants to leave the business.”

Often a situation will arise where one of the owners will have to leave the business for personal reasons, says Kral. His or her spouse may become terminally ill, or the partner may want to spend more time with a special needs child. Kral has even seen some situations where a business owner was instructed by his doctor to leave the business. “His doctor said that if you want to stay alive, get out of the businessthe stress was killing him,” he says.

This is the kind of situation that business owners dread. “But thats part of why we do the planningits contingent planning,” Oliver says. As long as business owners address these possibilities and draft how events will be handled in the future, “theyre going to save themselves a lot of heartache later on.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 20, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.