Most business owners have the passion, knowledge and expertise to run a business enterprise successfully. Unfortunately, many owners fail to consider a few critical steps needed to ensure the business survives and, in fact, thrives through uncertainty. By embracing the need to address the following key factors, a business can weather the types of uncertainty we sometimes cannot anticipate or otherwise fail to consider.
Create a formal, written shareholder agreement with your business partner.
Sometimes known as a buy-sell agreement, this document governs how the owners of a business will conduct themselves when certain events occur such as death or disability of an owner, or perhaps one owner’s desire to retire or to otherwise depart from the business. Businesses most often need a formal written agreement when a business partner dies. Should the business buy out the deceased partner’s interest? Does the surviving partner want to remain in business with the surviving spouse? Is there a funding mechanism to purchase the ownership out of the decedent owner’s estate? An agreement can address these questions when all owners presumably have a “clear head” about what the decision should be and what obligations should be on the business itself versus the surviving partner(s). An owner’s death is not the only trigger event an agreement should address. Also consider the following contingencies, all of which can impact shareholder value:
- Disability of an owner
- Disagreement between owners
Outline a defined succession plan for the owner and other key leaders.
Business owners may have thought about who should own their business when they die; many of these same owners; however, have not addressed the leadership of the business and who will be the most effective at actually running the business in the future. This is the difference between a transition plan (which addresses ownership) and a succession plan (who leads the organization). In many instances, the current owner is wearing several hats and is the “go to” man or woman for all decisions. His or her name may actually be part of the business name. While this is great for the owner’s sense of control over his/her destiny and the company’s reputation, it often does not bode well for the future of the company. How many people will it take to effectively replace the owner? Who is in line to replace the key people who have the ability to take over leadership? This leads to our third factor.
Develop a plan to retain the key employees in the business.
Every business has key people who help the owner drive success. In many cases, these employees have been with their boss for many years. They are experienced, resourceful and motivated to succeed. This means these employees might also be in high demand should an owner die or otherwise exit the company. A plan to reward and retain these people in the business is critical if an owner wants to build a successful plan of continuity in the organization. Key aspects of a successful business include plans for retaining and rewarding critical employees. Business owners can customize these plans to fit each employee’s job. The most successful retention plans are measurable, understandable by the employee and aligned with the employee’s daily job activities. Short-term bonuses are fine but are not necessarily an effective retention tool. Key employee plans strive to keep the employee tied to the business until retirement.
Consider the case of the 60-year-old owner who desires to transition the business to her 27-year-old son, who has done a great job learning the business. The lead sales manager and the CFO have been with the owner for the past 20-25 years and have been responsible for much of the business’s success in growing revenues and profitability. How will these two key employees feel about the son taking over? There needs to be a plan in place that will secure the key employees’ continuing loyalty to the business, and, as much as possible, reward them for their loyalty and high performance, even if that reward does not take the form of ownership.
The building blocks of every closely held business will consist of these three factors – and possibly other factors not discussed in this article. As you consider your own exit and succession strategies, consider how much time you need to focus on the business (a strategic long-term view), rather than merely in the business.
About the Author
Senior Vice President, Business and Financial Planning Strategist
Tom graduated from the University of Virginia with a Masters in Accounting. He holds his CPA license, is a member of the AICPA and has the AICPA’s Personal Financial Specialist designation.