The success of a company depends on the quality of its leaders and the management team they put in place. Often times, owners of a business spend a great deal of time and resources to put a management team in place that is capable of driving profitability and competitiveness while instilling the right corporate culture in the company. Such positive measures in turn benefits the owners and current leaders of the company.

The question is what happens when the company owners decide to retire or want to partially or fully exit the company? Is the company able to continue operations without its current key leaders? Can the company stay competitive and maintain its culture, complete the projects on hand, and acquire new projects, in the absence of its current owners?

Successful companies can feel good about these questions and their continuity only if they have a well defined succession plan in place. Such a plan will provide opportunity for the leaders to make changes and incentivize the management team for a better and stronger performance. This is when the expertise of the company’s financial advisors is pivotal. In partnership with company owners, the financial advisors with the right expertise are able to assess the situation and establish a plan that is designed specifically for the company and accommodates the financial needs of its owners. Irrelevant of the size or the current ownership structure, every company needs a formal written plan that maps out a succession strategy for every key role of the management and designs a gradual exit strategy for the current owners.

A proper succession planning evaluates different exit strategies while the strengths, weaknesses, and risks associated with each strategy is assessed so the owners understand the alternatives and are able to make decisions based on financial details and timeline of each plan. In addition, an orderly ownership transition allows the current owners exit the company while incorporates strategies that will strengthen the company and increases its value in the process. Such plan will allow the company to continue its operations and even grow its business. Employee Stock Ownership Plans are prime examples of such strategies in which owners find the opportunity to share equity in the company with employees and to attract, retain and reward a productive workforce. Furthermore, a meaningful succession plan allows transition of ownership in a win-win situation when the new owners have the liquidity to finance and fund payments to the seller without putting the company in plethoric financial hardship. Since many closely held companies don’t have a ready market to sell their company, and many times the owners’ children are not interested in taking over the company either, it’s best that the key roles are transitioned to the employees. However, most employees don’t have the financial means for a full value purchase; therefore, a gradual exit strategy can accommodate a smooth transition and the needs of the buyers and the sellers. Some other alternatives that offer gradual exit strategies along with succession are Employee Stock Purchase Plans, reorganization and recapitalization, or the use of certain pension plans structured to provide the ideal exit strategy.

Companies that wait until the last minute to develop a succession plan will face limited options and miss out on numerous planning opportunities. A sound succession plan normally incorporates a gradual transition of ownership that may take a few years to complete and works great for the company owners who focus on the future. Any prosperous company, with the help of their financial advisors, can design a meaningful succession plan that will give them the opportunity to develop the future leaders of their company and put them in charge while the current owners gradually exit the business. So, rather than asking if a company can afford spending dollars to put a sound succession plan in place, companies need to ask themselves if they can afford not to consider the future of the business and pass on designing a succession plan that enhances the success of the present while preparing for a brighter future.

Author: Fariba Mehdian, Partner of Gelman LLP, CPAs and Business Advisors, (714) 667-2600