The takeover: Selecting your successor

Choosing who will take over the business if an owner dies, becomes disabled, or leaves is a very difficult, emotional decision in many cases, especially for a family run business with children involved.

The ability to handle this particular selection process is one of six pillars identified in MassMutual’s 2018 Business Owner Perspectives study, and it’s a critical piece to succession planning. After all, what sense does it make to have a well-crafted and fully funded buy-sell agreement in place, only to neglect choosing and training a successor to take over the business at the time of an exit?

And just in case this hasn’t dawned on you, remember that 100 percent of business owners will exit their business someday — either by design or death or disability.

How should a business owner approach this decision? According to our experts, with an eye toward comfort level, by clearly communicating with the chosen successor, and by starting the planning process as early as possible.

Dress rehearsal

MassMutual experts recommend establishing an employment policy that includes guidelines for family member involvement in the business and how the next leader of the business will be selected. In most cases, business owners that responded to the MassMutual survey want to leave the business to a family member (30 percent) or sell the business to an employee (21 percent). Selling the business to an outside buyer was the preferred exit of 17 percent.

“This is one of the tougher ones, but it has to be somebody that they feel very comfortable with,” says Tim Powers, president and CEO of MassMutual Wisconsin. “We would often say, ‘Date somebody before you marry them.’ Get somebody in and mentor him or her. Make sure they understand the business and more to make sure that you, as a business owner, feel comfortable over time that this is the person.

“Ultimately, whether it’s a son or a daughter or a relative or a person that’s been there, they have to feel good about that person and that their decision is in the best interests of the business,” Powers adds. “It’s nothing different than in life, in general, in a long-term relationship. Who would you want to take over if you’re married and have three kids? The question of who is my guardian? That’s probably the same situation. Who is the guardian for my business if I’m gone tomorrow?”

To advise clients, Nathan Brinkman, president of Triumph Wealth Management, has been engaging them in what he calls the dress rehearsal around the worst-case scenario of the death of a business owner. “You kind of go through the dress rehearsal,” he explains. “Who is going to be in charge? Who is going to do what? Just let the business and the key executives see what happens. Sometimes, there will be an orderly decision and there is a natural leader, and sometimes it creates chaos.

“The reason you want to do this is, certainly, when you have owners who have kids that are not yet of age to come into the business or don’t have the skills to run the business,” Brinkman adds. “This is also where I like to tell people there is a difference between an operators and owners meeting. Some kids would be qualified owners of a business but are not good operators, so hiring that appropriate leadership team is critical.”

Once a successor is chosen, management should develop a written career path for the chosen one that includes time spent working in all facets of the business, and that means all facets — from the shop floor to the corner office. Finding a mentor outside the business could be helpful, as could having the would-be successor work outside the business for a while, perhaps even in a different industry, to gain experience and perhaps reinforce their desire to return.

In any event, it’s important to communicate a timeline for exit and the details of the successor development plan with family members and key managers. Andrew Klein, financial advisor and CEO of Focal Point Strategies, says the biggest thing his firm sees is that there tends to be a lack of communication between the current owner and whom they believe is going to be their successor.

“The current owner may have succession all mapped out internally, but in some cases they haven’t verbalized that to the person they see taking over, so there tends to be lot of miscommunication about who is going to take over and the roles and responsibilities,” Klein states. “One of the things we talk about a lot is having that conversation with your successor as early as possible, especially if it’s a son or a daughter or another family member in a family business.”

Piggybacking on that, Klein’s colleague at Focal Point Financial Strategies, J.P. Aime, says the conversations they have with clients start with a question: If you aren’t here tomorrow, who will take over the business and the responsibilities? The follow-up questions typically are: Do they know that? Have you communicated that to them?

“That isn’t often the case,” laments Aime, a financial advisor and the firm’s president.



“The other piece, if you are looking at generational businesses, is that a lot of owners believe their exit is going to be a transition to the next generation. They bring in little Johnny or little Suzie and the first thing they want to do is not entitle them, so they have them sweep the floor or get the mail,” Aime explains. “They do the remedial tasks within the business. Those are important but what we believe they should be grooming them to do is run the business.

“So, if my son or daughter is going to be taking over for me, they should understand all the functions of the organization and what people do, but at the same point in time, they really should be in the seat next to mom or dad and learning how to run the organization. If they truly are the successor and something unexpected happens to mom or dad, and the only thing they’ve learned how to do is work in the business, not on the business, that can pose a pretty significant challenge.”

Since business owners simply don’t want to think about their own mortality, they prefer to talk about the “you-living” plan, not the “you-dying” plan, and so financial advisors have to run a fire drill. “You play defense before you play offense,” Aime explains. “You have to be prepared for the unexpected, but we also have to play more on the offensive, so we say, ‘Hey, at some point, you are going to exit this business. We’re not quite sure what’s going to cause an exit, but you will exit this business someday.’”

Pardoning partners

In a partnership situation, is it automatic that the other partner takes over? “It could be, but it depends on what the partners have discussed,” Powers notes. “It’s like a marriage. Obviously, that can change, but we often see that if a partner dies tomorrow or is out of the business, the other partner will continue to go on and the buy-sell agreement takes care of that.”

In Wisconsin, if the partner dies, the spouse will take over as 50-50 owner in that business, Powers notes. With the proper buy-sell agreement, the partner who’s remaining can buy out that deceased partner’s share and become 100 percent owner, and then they can adjust if they want another partner or they want to move on by themselves. “In the buy-sell agreement, it’s going to be very specific about the person who takes over the business,” Powers states. “If somebody is just retiring or leaving, there will be a succession plan in place. Some owners are very controlling about what they want to do if they pass away or if they just retire. As you know, some owners just won’t leave until they die, but there will be a document on both cases. In the case of a retirement, there will be a succession plan, but there will be a buy-sell document for death and disability.”

Brinkman believes people would be shocked at how many businesses launch without the necessary agreements. Everybody knows they should have them, but the execution is an additional expense because attorneys and accountants are needed “to figure some of this stuff out, and so they generally find other ways to spend money in the business,” Brinkman notes.

Since the odds are against you when you launch a business, sometimes people will start with the intention of getting those agreements done once the venture passes a particular mile marker or hits a given benchmark. “When they get to that point, it never gets less complicated. It generally gets more complicated,” Brinkman says. “So, certainly, I highly encourage folks to start off with partnership agreements.”

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