Succession Planning

BARRY: So succession planning ties in, which is the next thing that’s bold. I get excited about it. Stop me if I’m talking too much. Succession planning is kind of like what we’re talking about, where instead of you wanting to sell or exit to a third party or family member, you want to keep the business going. Right? You want the business to continue to the next generation. Maybe that’s your family. Maybe it’s not. But if you don’t have the right planning in place, you’re rolling the dice. And I will go so far as to say it’s very likely you are not going to roll the numbers you need to roll.

CHAD: Especially when there are multiple partners or shareholders, it’s even more important, I think.

BARRY: Yeah, I would agree. I would agree. So how would you introduce the concept of succession planning?

CHAD: Well, for one, you hit on it: “I want the business to continue.” The question really becomes, who do we want to continue it? And how do we give them control of the business without financially hurting the cash flow and the day-to-day operations of the business while receiving your fair share without depleting the business. There’s various funding mechanisms that you can do, most typically through insurance, to really work on this succession plan.

One of the easiest is if you’re turning it over to someone inside the business. Because you can set up executive bonus-type plans or whatever it might be to build up a reserve to maybe buy you out so that person can take over the business. That’s very common. It’s all about pre-funding for what you want to happen. Putting the right instruments in place, financial vehicles in place, to keep your business afloat. Succession planning is more about “How do effectuate everything without depleting the cash of the business and hurting the business?”

BARRY: Right. So how does that translate? There are so many things that could happen, so many variations. Say, for the sake of argument, it’s a third party. You have a number two. You have a number two that’s great, and you want them to continue the business for the next 50 years after you go. It’s not a family member, not part of the estate plan. What do you do with that? How do you deal with that?

CHAD: Well, one, you have to have the correct legal documents in place, which is in your wheelhouse. Two, you can start funding for that transition. Because most times, the key employee probably doesn’t have the money to buy someone out of the business and still keep it running. So really it comes down to assisting with the process ahead of time while you’re still in charge.

BARRY: You’re going to address disability and death, of course. That’s a funded transaction to make sure the business can continue without having to financially burden it.

CHAD: Right. The perfect example: let’s say one partner gets disabled and can’t work anymore. If you don’t have the disability buyout in place, that business is still going to have to keep paying that partner or that shareholder. Talking about fire sales and pennies on the dollar, you can effectuate these buyouts for pennies on the dollar just by implementing the correct disability policy or life insurance policy.

BARRY: If you get disability or death, you have a policy that will fund the transaction of where the family gets paid in exchange for their shares. Those shares go to the person or people who are intended to continue the business. And that’s fine. That’s one thing that can happen. But what about where you have a person who wants to retire? There’s no retirement-triggered insurance contract. Disability and death is one thing, but retirement during life is another whole animal to deal with. A lot of times in an estate plan, I see this scenario: you’ve got people who built something, and a lot of times their kids are kind of involved in the business, and they want the kids to kind of move it forward, and they want to retire. They want to downshift, pull back, and let the kids push forward. And we start talking about the transition or shift of control. We talk about the timing of transfers, which of course is very heavily related to tax. And it’s definitely hard conversations, because you’re juggling a bunch of competing things. The idea, though, the purest spirit of it, is that they want an annuity. They want the business to pay them an income stream for life. And they want to figure out a structure for that. It’s not a death-triggered buyback, it’s a lifetime transition. Retirement with those other contingencies built in as well.