Putting the “Success” in Succession

Funny thing about succession planning, but there’s not a lot of discussion about what “success” means. In my decades of law practice, working in collaboration with accountants, business planners, coaches, and financial advisors, nearly all the focus was on the mechanics of succession.
To be fair to the professionals involved, by the time we were brought in, the deal had already been agreed in principle, and all the parties were starry-eyed. You’d sometimes feel like the clergyman presiding over a marriage of strangers.
We did rollovers and butterflies and multiple family trusts, and restructure upon restructure, and most such plans were things of beauty, Swiss watches of execution that saved bags and bags of taxes. But almost all such plans assumed that the successors would succeed, the business would thrive, and the founder would go off into a blissful, fulfilling, well-funded, and richly deserved retirement.
What was mostly overlooked, or perhaps assumed, was that the successors had what it took to make the business survive and thrive, or at least keep it alive long enough to get you paid out. But I have bad news for you.
In the cases where the successor comes along with a bag of money and pays cash for assets, it’s generally a no-brainer. It’s likely that if they have that kind of money and know what they’re buying, they already have the know-how to take over the business, or fold it into their own existing business. And anyway, who cares, because you get cash.
But when a stranger comes along and wants to buy the company, including the goodwill, on some kind of earn-out basis, that’s another story. Goodwill is a fragile flower that can wilt and die before you get paid.
The same is true when family or employees take over from the founder. Generally, these successors don’t have a bag of cash to whack on the table, so the whole structure depends on some kind of earn-out. Ditto when a stranger comes along without cash and wants to buy your business with you acting as the bank. The reasons for concern are discussed in my longer article.
In all these cases, the successor is taking over the business as a going concern, hoping it will do well enough for them to feed their own families and still find enough extra money to pay you. And that’s what you hope, too.
It doesn’t take a lot of reflection to realize that if you have been living off a business and you hand it to someone else, hoping they will continue to pay you out of the business, you really need to hope they succeed better than you did, because now there are two families to feed– theirs and yours. And that proposition is a dicey one.
Even if your lawyer is smart enough to build in control-clawback provisions, by the time you get your hands back on the corporate steering wheel, it may be far too late. Your cash cow is dead, to again mix metaphors.
So, really, the key at the outset is to determine the probable success of the successors. Do they have what it takes to keep the enterprise running at least long enough to get you paid out in full? And if your company’s reputation was important to you, will they burnish it, or destroy it?
Unsurprisingly, the criteria for the success of your successors is exactly the same as the criteria for the success of an individual throughout a career. That is, the Alignment Principle applies.
You’ll recall that the Alignment Principle teaches that magic happens when an individual’s giftedness exactly matches the needs of his or her clients. Applied to a business successor, this means that the outset likelihood of their success follows directly from their natural aptitude to satisfy your existing clients or customers.
This notion is expanded at some length in an extensive paper which I’ve posted on LinkedIn (https://www.linkedin.com/pulse/how-put-success-succession-norman-bowley-jd-llm) .

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