"Often the terms "succession planning" and "exit planning" are used interchangeably, but the terms mean different things in different contexts…."
Our newly published Exit Planning Edge e-newsletter addresses the issue of using incentive comp as tool to keep key executives focused on the owner's strategic objectives.
To read the issue, click here.
We've said it here many times, but it can't be reiterated often enough. Whether a $10 billion business or a $10 million business, your Key Employees are critical to your value and your profitability.
In an interview with business guru Ram Charan in the December 27, 2010 issue of the Wall Street Journal, Charan drives the point home. He says less than 10% of CEOs are focused closely on profitable growth and suggests quarterly reviews of people the way the CEOs do quarterly reviews of numbers. He also believes that in addition, to financial rewards for profitability, key people should be rewarded for how many other leaders they produce.
Here is a list of Ram Charan's biggest talent-management mistakes:
So, why all this in a blog about Exit and Succession planning? Charan's work is with Fortune 500 companies and our work is with companies under $150 million in revenue, most of them between $10 and $30 million. What can we learn from Ram's teachings? Owners of these small Middle-Market companies want to get the best price when they sell their companies. Sometime before they sell they either have made or will need to make the transition from and entrepreneur–led to a management- led company. The development of their Key employees and their ability to develop leaders within the organization will add tremendous value down the road.
Susan Laine, CEO of Structured Financial Partners announced today that the firm has launched a life insurance division which will be headed up by her partner, Steve Craig. Ms. Laine will continue to lead the firm's Exit and Succession planning consulting practice.
The mission of the SF Partners Life Insurance Division:
SF Partners Life Insurance Division is focused on providing Personalized Solutions for Complex Problems to our clients who we define and the owners of closely held middle market companies and their senior executives. We bring a consultative approach to problem solving, creativity to plan design and clear concise explanation of what is being recommended and why.
We made this strategic decision at a time when clients in our marketplace need clarity. They don't need a life insurance agent who is a financial planner and wants to manage all their assets. They don't need a life insurance agent to handle their employee benefits, because that is an entirely different specialization. They don't need an agent who has one company's name on their card, but claims to be independent. They need an agent whose only loyalty is to the client—no preconceptions as to what products need to be purchased or which companies need to be used.
Our approach to life insurance is quite simple. It can be a powerful financial tool when applied properly to the appropriate situation.
Please check out the new Life Insurance page on our website
In the middle market business community, we often hear the terms "Succession Planning" and "Exit Planning" used interchangeably. They are not synonymous, but rather two terms that are closely related.
We see succession planning as an important component of the exit planning process.
Exit Planning is a global approach. It involves coordinating all the decisions a business owner needs to make prior to leaving his or her company.
For the full text of the July issue of Exit Planning Edge, Please click here.
The topic of Exit Planning is getting popular. Professionals in different disciplines are talking about it with their clients. Some are acting as members of a collaborative team being quarterbacked by another of a client's trusted advisor. Other professionals yet are venturing out further and adding Exit Planning to their practice as a distinct discipline.
But it is interesting to me that Exit Planning has moved enough into the mainstream that its practitioners can be the target of a marketing pitch. Today I received, a blast email from a clinical psychologist in Massachusetts, offering to consult with my corporate clients on the psychology of Exit Planning. It was a professional piece including testimonials from professional advisors, one whom I am acquainted with and which painted a clear picture of succession, transition and departure roadblocks a business owner might face.
The fact is, in our consulting practice, much of what we do is play amateur psychologist. We poke and probe our clients to try to find out their real objectives and their true motivations. We coordinate other advisors on our collaborative teams and try to avoid ego clashes and turf battles between multiple advisors, the client, management team and sometimes multiple family members. And sometimes amateur psychologist doesn't cut the mustard.
In corporate planning, it is common for us to bring in a psychologist with experience in dealing with conflict resolution between stakeholders in a business. One might think the need for this type of intervention is exclusive to a family business, but it is not. Conflicts between unrelated co-owners often arise. In our exit planning practice, for example, we see the older owner wanting to play it safer as his retirement nears and the younger partner may want to deploy capital for growth that will benefit the company after the older owner is gone. At one level these are just strategic business discussions, but often they turn into deeply emotional confrontations that can't be resolved without outside help.
And then there is the issue of what the business owner is going to do with his or her life after the business is gone. For most owners, they have spent the better parts of their lives building their companies. Walking away can leave a gaping hole where it used to be. Some owners refuse to enter into serious discussions of their exit because they so fear of the emptiness life after their company sells.
In the exit planning process, the business owner must arm him or herself with a team of professionals to help navigate to waters of succession, transition and departure planning. Those professionals will come from a variety of disciplines and should work together in a organized manner.
My partner was at a meeting this morning where her reputation had preceded her. She was accosted by an attorney who by way of introduction said, "You're Susan Laine, you do Exit Planning. You must use TCLATs in your practice…" Susan just stood there and allowed him to continue. "What about 368…?" He continued. Susan knew, of course, that these were tools that might be used by a business owner in his or her planning. A Testamentary Charitable Lead Annuity Trust or TCLAT is a trust which may be created by a living trust or will which requires the trustee to make a stream of payments to a charity (for which it gets a tax deduction) and at the end of the trust period pays out to a family beneficiary. The "368" the attorney referred to is Section 368(a)(1)(A) of the Internal Revenue Code which allows for tax-free treatment of certain mergers and reorganizations.
All this is immaterial when put in context. Exit planning is not about the tools we use. It is not about the hottest new asset protection trust or captive insurance company. Exit planning is not about buy-sell agreements whether or not funded with life insurance. It is not about ESOPs. All these things are tools. Just like "368," TCLATs, 83(b) elections, SARs and Phantom Stock. Until we know the specs of the job TOOLS AND TOOL VENDORS are immaterial. Some professionals (accountants and attorneys) get enamored with a certain planning technique or product and push it as aggressively as any salesperson.
Imagine you're building a custom house. As you sit down with your architect, you ask the architect what kind of nail gun the general contractor's carpenter is going to use while framing the house. That is what this attorney looked like to Susan. Like the architect, with each client, we develop a plan—a blueprint. And for each client we assemble a team of professionals who will work together to execute the clients wishes. Each team has a CPA and one or more attorneys, and other team members will be added as the project dictates. But NO ONE comes to the table with a preconceived notion of what tools will be used.
It's not uncommon for a person who is well acquainted with my work to introduce me to another professional in this manner, "I'd like you to meet Steve Craig. His firm does Succession Planning."
People unfamiliar with Exit Planning want to assume that it is the same as Succession Planning, that the terms are interchangeable. They are not.
Succession Planning is a term that relates to a BUSINESS and ITS ability to continue through the change of management or ownership. It is a business focused exercise. It includes providing successor management the opportunity to develop necessary skills. It may include contingency planning techniques to protect the company against the death of key management personnel.
Succession Planning is an important topic to many owners of closely held companies, but it is only one of many aspects of Exit Planning.
Exit Planning is focused on the needs of the business owner not the business itself. In the closely held business market, you might think of the two as inextricably linked, but we start first with the owner's objectives and then build a comprehensive plan. An exit plan is a road map that begins with the owner answering three critical questions:
After those questions are answered and we understand the owner's basic objectives, we dig deeper. We might learn that the owner must grow the business to achieve his financial needs in retirement. We might learn that the owner wants to hand the business off to a family member and will need the support of other key management team members to make the transition. This calls for succession planning. After addressing succession planning we address how the business planning coordinates with the owners overall estate planning.
So, while Exit Planning and Succession Planning sound alike, think of Exit Planning as a comprehensive strategy for an owner to use in the years prior to leaving his or her business, with succession planning being a sub-set of a comprehensive exit plan.
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