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When the Problem Is Not the Problem

March 6, 2015

when is a problem not a problem

How a Succession Portfolio Framework Gets You out of Reactive Mode

Surprisingly, only about 10% of Family Owned Businesses (FOB) are transferred to a third generation, according to Le Breton-Miller3 and Harter1. Historically, most business owners’ number one priority is growth of top line (sales) and bottom line (profit), regardless of the type of business.

So why in the world would anyone want to devote time to succession planning?

Let’s assume a business meets the following conditions:

1) It’s at a mature stage

2) Top line and bottom line are the top priorities of the business

3) Run by first generation Founder-Owner-Manager (FOM)

4) FOM has family members involved in the business

5) It has a viable business model for the next 5-10 years and will remain continuously competitive in the industry, with or without FOM in place.

Let’s further assume that a Succession Portfolio (SP) has 3 programs:

  • Employee Succession Program (EE-Suc)
  • Customer-Driven Succession Program (CRM-Suc)
  • Investor Succession Program (EQ-Suc)

Each program has separate projects to address specific areas.

See below Figure SP-1: Succession Portfolio (SP) Framework

when the problem is not the problem

An empirical study from Kansal4 indicated that lack of integration of SP going into retirement planning prevents owners from seeking help in structuring a solid SP.

When I work with clients, it becomes apparent that a viable business model drives the entire SP. The SP then determines the timing of each layer of the SP program and subsequent projects within the CRM-Suc, EE-Suc, or EQ-Suc programs. Unless the SP is structured properly, the FOM will tend not to consider the EQ-Suc program alone, according to Kansal4. That being said, there are many EQ-Suc implementation tools identified in Harter2, such as a type of Buy-Sell Agreement.

During a recent business trip to Washington DC, the east coast was hit with a winter storm, and I was stuck in the middle of it. It was the first snow of the season and dumped about 2 inches during peak commuting hours. The road was not plowed in time to accommodate the high volume of rush hour traffic. Many commuters got stuck on the road and were very unhappy with the average 2.5 hours’ delay getting to the office. (Of course, the kids were happy campers because schools were closed.)

It became apparent that the problem was not the snow, because we can probably all agree that 2 inches is not that much. The problem was that the municipality did not handle the logistics and tactics well, despite their own forecast. They put themselves in reactive mode, ultimately faced with having to handle a situation they had created—not to mention many complaints from grumpy commuters caught in the gridlock.

The need for a properly structured Succession Portfolio (SP) is, for the most part, identified as economic value measurement. Harter2 cites that more than 50% of most owners’ net worth is in business equity. The continuous success of the business depends on how successfully the SP is executed and the flexibility and adaptability of each program.

As when a 2-inch snow storm shuts down the nation’s capital, even a mediocre SP will threaten a business’s future, as well as an owner’s ability to retire. And, it can throw the entire business into a spin—like a commuter on the slick roads of DC!

It seems the municipality should have been able to look to its own tools to find the appropriate ones to use. For example, in this situation, the D.C. plan was for the municipality to send out trucks to brine the road instead of using salt. However, this escalated traffic congestion and paralyzed most of the roadways during rush hour.

An empirical study from Potts5 and Potts6 shows, unless the FOM’s retirement planning is properly addressed, it is difficult to motivate an FOM to move forward with any part of the SP.

Therefore, having a discussion about an EQ-Suc-specific implementation tool will not help any FOM understand why and how to move forward for the overall well being of the SP. Any mismanaged program will send the FOM spinning and halt the entire business—much like DC came to a complete halt during the 2-inch snow because a wrong forecast and plan was used.

Has this article triggered questions about your business Succession Portfolio Framework? We leverage the Triple Bottom Line concept to run a business Succession Portfolio (SP) Framework to guide our clients. We help them determine the most appropriate next step per SP without losing sight of the overall well being of the enterprise.

Once you have a sustainable and viable business enterprise that continues to create equity value for the owners, the tools to use within SP become obvious and timely.

References:

1Harter, L. (2008a). Succession Planning: “What Prevents a Business from Hitting One out of the Park?” Journal of Practical Estate Planning, 10(4), 19-53.

2Harter, L. (2008b). “Succession Planning Part II: Business Succession Is a Team Sport.” Journal of Practical Estate Planning, 10(5), 17-24.

3Le Breton-Miller, I., Miller, D. & Steier, L. P. (2004). “Toward an Integrative Model of Effective FOB Succession.” Entrepreneurship: Theory & Practice, 28(4), 305-328. doi:10.1111/j.1540-6520.2004.00047.x

4Kansal, P. (2012). “Succession and Retirement Planning: Integrated Strategy for Family Business Owners in India.” Vilakshan: The XIMB Journal of Management, 9(1), 23-40.

5Potts, T. L. (2001a). ”Effective Retirement for Family Business Owner-Managers: Perspectives of Financial Planners, Part I.” Journal of Financial Planning, 14(6), 102.

6Potts, T. L., Schoen, J. E., Loeb, M. E., & Hulme, F. S. (2001b). “Effective Retirement for Family Business Owner-Managers: Perspectives of Financial Planners, Part II.” Journal of Financial Planning, 14(7), 86-96.

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About The Author

Chia-Li Chien, CFP®, PMP; Exit Strategist for Women Business Owners at Value Growth Institute in Charlotte, NC. She is the award-winning author of the books: Show Me The Money and Work toward Reward and a faculty member of the American Management Association. Her blog and newsletter was named a Top Small Business Resource by the New York Times You’re the Boss blog. She can be reached at jolly@chialichien.com or 704-268-9378.

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