1. Begin With the End in Mind
“You need to start with an exit strategy,†says Gandy. “Most businesses have no succession plan because they go into it not knowing if the business was ever going to go anywhere, so once they’re in the middle of it there’s no way to get out.†Gandy suggests that before you start with a valuation of the business, set goals, and discuss revenues, you should talk about the continuation of the business. How are you going to grow it, build it, multiply it? Are you going to sell it, liquidate it, or keep it in the family?
The lack of succession planning in the previous generation spurred the Johnson siblings to take action. “We decided to document the company’s operations,†Charles Jr. says, “rather than rely on oral knowledge. Jessica and I get together periodically to discuss specific topics, such as payroll and taxes. We record these conversations so the information is available. In case someone else takes over the company, these records will provide a guide on how to run it.â€
2. Build Your Team
There are a series of people that need to be involved in the process, says Gandy. “You need an accountant, financial planner, a banker, and definitely an attorney to make sure that the structure of the business is designed correctly to meet your goals. Many people get into business with the idea that I’m going to grow the business and then I’m going to decide what kind of entity we’re going to be. You should be asking yourself, ‘How are you designed from a tax structure?’†Use your network to identify professionals to add to your team. “Referral is the best way to build your database of professionals. Go to other businesses like yours and find out who they’re working with. Your Chambers of Commerce is also a useful resource in finding key players.â€
Jessica credits her team of advisers, which includes two attorneys and an accountant, with helping to transfer the company’s shares to herself and her brother. “There were state regulations involved and certain licenses to maintain,†she says. “It took a while, and there was some trial and error, but we are now the ones who own and manage Johnson Security Bureau.â€
3. Assess Family and Internal Candidates
Find someone who has an interest in the business, advises Gandy. “I recommend you set up a family meeting and find out who those people are. The worst thing you can do is to try to have a succession plan with someone who doesn’t want to be in the business. In that meeting, find out what those family members want for the business. What does it mean for the family? What kind of legacy do they want for this business?†Gandy also recommends setting up a board-appointed search committee that could include staff representation, an accountant, and an attorney. “Just because you’re family doesn’t mean that you can take shortcuts. You want to make sure that you have all the right people in place and that it’s legal and binding,†he adds.
To identify a key person who is not family, Gandy suggests that you look for leaders within the organization. These are people who play multiple roles and have a vision for where they want the business to go once you’re gone.
While keeping their eye on a possible future generation, the Johnsons have started discussions with their team of advisers about a succession plan for right now. One of the advisers on the team, Andrew Karlen of the law firm Karlen & Stolzar in White Plains, New York, says that a family business with co-owners generally should have a buy-sell agreement in place. “A buy-sell agreement specifies events, called ‘trigger events,’ such as death, disability, bankruptcy, or divorce, which will require or allow the sale of the affected owner’s interest to the other owner or the company,†he says.
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