Succession planning too often is relegated only to owners of family controlled businesses, but there are many reasons why you, as a dealer or a collector, need to plan for the succession of ownership and control of your artwork both during your lifetime and after your death. These include:
- See others benefit from your generosity,
- Keeping your personal use and control of your personal collection during your lifetime,
- Having your acumen, expertise and generosity recognized,
- Test and educate donees in the management and ownership of artwork and collectibles now, when a more substantial testamentary gift in the future is considered,
- Reucing the management, tax and administrative burdens involved with owning and transferring tangible property,
- Fulfilling your legal and moral obligations to your family, your collaborators, and your community, and
- Protecting your personal collection from the ownership or control of future creditors, such as the claims of a divorcing spouse.
With so many goals, what are often overlooked are the facts. In order to begin a succession plan, you need to tell others about your personal collection.
Why is a succession planning important to me?
It is important because it allows you to shape the future for your collection and your family. A leader of in the art business cannot predict when (not if) they will need to have professional management to step into their role in the art business, even if they have a planned retirement date, since none of us knows when death, injury or disease may incapacitate us.
When should I start succession planning?
In a very basic way, succession planning can start from the beginning. One of the questions I always ask when a client forms a collection is “how will it disbursed?” that is when things go wrong, how will you, and your financial partners, move on from here? Having early discussions, when there is not an immediate perception of “money on the table” makes succession planning much less emotionally charged than later, when greater wealth is involved.
That said a late succession plan is better than the default succession plan of sale of the collection. It is always better late than never.
Who should I involve in the planning process?
For dealers, at the least you need to involve 1) the current owners of the firm, 2) the current leadership of the firm, 3) the key advisers 5) the leadership of the family and 5) a moderator. It is better to include more members of the management team and of the family because if they participate in the discussion process, there will be buy in when the plan is implemented, which may be at a crisis point in the management and leadership of the firm.
What are some of the common problems I can expect in terms of succession planning?
1) Lack of communication. The family and the management of the firm or collection do not know what the estate plan is of the owners, and how that effects the concentration or break up of ownership control. The personal representative nominated in the estate plan does not know the role that they will to play in the selection of the new professional management of the firm, whether to sell some or all of the collection, what is a reasonable price and commission scale, and so forth.
2) Lack of modeling. Many times there is no “dry run” of the succession plan, and many of the errors or misunderstandings between the business plan, the estate plan, the financial plan, and the asset protection plan are not discovered until it is too late.
How can I avoid these problems?
1) Review what you have. This addresses much of the communication problem, in part by letting the ownership and management know what there is, and more importantly what there is not, in place already, but which may need to be better coordinated.
2) Run the model. Take the model of the succession plan and do a dry run with different conditions. These conditions should be what is possible, based on the trends inside the art market and outside the art market, not just what is most likely to happen. A firm that is in an a market or industry where change is gradual and predictable (such as old masters) still needs to think about what happens if there is a sudden need for professional management due to inside (death) or outside (market change) forces.
3) Create Scenario Plans. Work on creating plans based on possible scenarios, and let people know of these plans, so that they can react correctly in times of emergencies. In most cases, scenarios have names such as “Code Blue” in an emergency room, and do not tell the management and experts every detail of what they will have to do, but what their role is, what they need to be ready for, and who they are working with, and most importantly, what the common goal for the organization is.
4) Review periodically. Research and experience shows that there are a number of characteristics that existing with families and companies that are sustained over many generations, and you should review whether your company has those characteristics. If they do not, then you should ask why and how you can acquire those characteristics. Although having these characteristics does not guaranty success, they greatly reduce the chance of failure during a succession process.
How much time should be given to try to improve a declining situation?
I will give you a typical lawyer answer, “it depends”.
You have to realize that a professional manager of a collection, even art dealership is quite different from a founder of a company, or someone who “grew up” in the business. Not only is their education different, but also their motivation, authority and style are different. Founder’s education in a business is usually idiosyncratic and uneven – deep in some areas like authenticity, but shallow in others like PE financing of growth. Founders usually are in love with the company, while professional managers are in love with the product. Founder’s authority flows from their ownership of the company, the professional manager ‘so authority flows from their title and position. The financial rewards for the Founder are equity growth, the financial awards for the professional manager is salary and bonus growth. And so on.
If you do not recognize the difference in styles and natures between a Founder and a professional manager, and their different milestones towards success, then you will end up with one side very frustrated with the level of progress on their milestones, while the other side is happy with the level of progress on their milestones, since they are measuring success based on completely different milestones. If that is the case, the length of time the professional manager is given is not relevant, since the Founder will never be satisfied no matter how long they give the professional manager to work on the problem.
What steps can I take to smooth the transition?
- Record how things work at the Firm. Any professional manager will feel a desire to “kill the sacred cows” but some of these cows serve a very useful function. As things evolve with your bank, the non-management Family and the integration of the new people and operations over time, those habits should be codified and the Professional Manager should be aware of these and other practices so that there is not a lot of meaningless time and energy spent reestablishing a good working relationship with each from the start.
- Regular Communications. There should be a start on having more formal and detailed communications between the management and the owners (even though they are the same person) in part because this gives a new Professional Manager some sense of why you, and Family Management, did something, and because it will set the expectation of how and when the professional manager will communicate with you and the Family if you and they are not in the management.
- Financial Interests. The financial interest of the Professional should be tied in some way to the realization of your financial and transactional goals. Care will need to be taken that such financial incentives do not threaten the control of the company or inhibit getting access to capital later.
- Be part of the Community. The professional manager needs to commit to being part of your social and business community. This includes good communications with employees, clarification of changing rolls and teams as new skills and methods are adopted, and working hard on the political as well as corporate management of information. The professional manager can’t commute from New York City to London.
- Changing the Board from an Advisory to an Executive Role in the Firm The advisory board is your way of getting the skills, connections and experience that could not have developed while running of the Company. The Professional Manager should already have these skills and experience but he or she will be to have oversight and accountability. The Board should change from an Advisory Board to an Executive Board when a professional manager is brought in to provide this oversight and accountability of the professional manager.
What’s the role of my board, family and others in this transition process?
The role of most boards begins as an Advisory Board, which gives the founder and family access to the expertise and experience that they otherwise would be lacking. As part of the succession plan, the Board must transition to an executive board that is one that has the power of oversight and holding management accountable for their actions, based on a long term vision of the business. It is critical in this process that family members understand the importance of a strong Board, and the need for the Board to be deeply involved in top executive matters and business portfolio strategy. Also, there should specific and written procedures for nominations of insiders and outsiders to the Board.
The management of the business is critical in that they will be the ones who develop and implement the prudent and professional business portfolio process, including when to reinvest for growth, when to seek outside capital for growth, when growth should be through M&A or when it should be by organic means, and so forth. They are, therefore, the ones who execute the succession plan, and are critical in the modeling to show when and where the plan will not work, or could work better.
These questions seem overwhelming, but addressing them now bit by bit, you can avoid having a fire sale of your personal collection and a lifetime of regret for your heirs when they are forced to give up control of your collection during the management of your estate. A well laid out lifetime succession plan is immensely satisfying, and profitable, during your lifetime and beyond.