Succession Planning Checklist for MA Business Owners

On June 25, 2013, the New York Times reported the story of Erica Rosenfeld and Susan Parker, co-owners of Bari Jay, a garment manufacturer in New York City. They became co-owners when their father, Bruce Cohen, suffered a fatal stroke over lunch one day. He left no succession plan. Most everyone would agree that it was impressive that the two sisters were able to keep the family business together despite the industry’s intense competition. However, anyone involved with their own family business can recognize how their feat was, in reality, nothing short of remarkable.

Horror stories like this one are abound in family business periodicals, but family businesses are not the only ones at risk. According to Rick Flynn, partner at Rothstein Kass, over 62% of key owner/managers and key nonfamily employees and advisors to family offices do not have a succession plan. Rick summarizes the challenges and best practices of succession planning in his most recent newsletter.

The cause of poor succession planning in family offices is a double-edged sword. Succession plans always require professional management of family-controlled wealth, but professional management introduces issues that can threaten the sustainability of familial wealth over generations.

Succession Planning Risk Assessment Index

I have developed the following index to help determine the level of risk for your family succession plan. A subset of this index deals shows how professionalization of family-controlled wealth often fails. The index is not a list of suggested solutions, but rather a tool to help you quantify your risk and focus in on the right problems.

This index structure gives you, the family business, and the family office the context of potential conflicts. This allows you to allocate your scarce time and resources, motivate yourself and others to take concrete actions, evaluate the effect of those actions, and have a generally clearer picture of what lies beneath the surface of family-controlled wealth. If nothing else, I hope you walk away from the index with the idea that indexing and metrics can be useful tools to have in your belt.

Following are ten research-based statements that highlight the most common mistakes made by owner/managers of wealth. These oversights often lead to the failure of family succession management, in both businesses and family offices. I have also included a brief discussion of the pitfalls of introducing new management or advising.

Click here to download the Succession Planning Checklist

Analyzing Your Results

If your cumulative score is negative, you are at a high risk of succession plan failure as a result of the divergence between your “automatic” thinking and the methods of professional managers. If your score is a low positive, then the disconnect between you and your professional management successor for family-controlled wealth may soon become an area of friction.

But why should you, as an owner/manager of family-controlled wealth, have different attitudes than a professional manager who does not have ownership in family-controlled wealth?

As an owner-manager of family wealth, your experience and expertise is very different than an outside professional manager. For better or worse, you have “grown up” inside the family wealth, growing as the wealth grows. With a family-controlled company, a board of advisors brings technical skills and perspectives to owner-managers and nonfamily employees who have come up through the ranks of the business or the family office.

Ultimately, your position as the owner (and sometimes creator) of family wealth has strengths and weaknesses that are quite different from those of someone who has learned his/her trade in a classroom or another (usually larger) company, firm, or institutional service provider. These strengths and weaknesses can be used to your benefit, but only if you are aware of them; you must know how every individual’s qualities complement and balance out the others. This is especially true when preparing for changes to family wealth in an emergency, when decisions must be made in haste.

Professionalizing a Current Nonfamily Employee or Advisor

Many owner/managers of wealth look to their current employees or advisors to manage unwieldy aspects of their wealth. Over three to five years, the owner/managers slowly pass aspects of management to the designated individuals. It takes so long because the successor may or may not have any expertise in the field. The motivations and abilities of the nonowner are important, but even more crucial is the level of trust between the family and the employee/advisor. Although it seems harder to find an outside professional to take over management, an existing, trusted employee or advisor can run into trouble when:

  1. The employee or advisor has excellent technical skills but lacks the training or experience to manage the company, do strategic planning, handle complex finance issues, and navigate complex intra-family issues.
  2. The employee or advisor has little or no ability to properly develop and delegate to subordinates since they’ve never had to do that in the past.
  3. You made your choice without a formal program to interview, assess training, or implement the succession plan. The selection has been “anointed” by you or the family and not based on merit.
  4. The employee or advisor’s compensation lacks competitive incentives (equity or otherwise).
  5. The family is not willing to treat the nonfamily employee as an equal when it comes to enjoying benefits they get from the company.

The goals of any succession plan include keeping leadership firmly in the hands of the family as owner/managers now and preparing for the integration of professional leadership either immediately, as a result of a jolt such as a sudden family death, or over time, as part of a gradual transition. The succession plan, however, is liable to fail if your assumptions are substantially different from the assumptions of professional managers (whether members of the family or not) who have different expertise and experience.

By using the above index, you can reveal your personal assumptions and automatic thinking and, with some research, understand the difference between you and professional management as a successor. Even if your succession plan has yet to begin, the index will help you safely manage the future of your family wealth and safeguard you from the unexpected. Don’t get caught in the same chaos Parker and Rosenfeld were caught in. Take the necessary steps to keep yourself, your family, and your assets safe.

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