If you’ve ever owned a company—or even been employed by one—you’ve probably discovered a surprising and even ironic truth: a successful business is a delicate thing. Dynamic organizations weave together dozens of independent threads, from having strong financial backing to creating a positive employee culture to knowing how to launch new products cost-effectively. Damage one fiber and things can start to unravel pretty quickly. That’s one reason thriving business owners focus on long-term strategy, building in safety nets to protect their operations in challenging times.
One of the most reliable predictors of business success is leadership. Assembling and retaining a talented, cooperative team of leaders isn’t easy, though. Many companies go through several iterations during their lifetime. Owners and executives come and go. And each transition can bring a lot of upheaval with it. That’s where certain strategic tools, including succession planning and buy-sell agreements between business partners, come in.
How prepared are you for an uncertain future? Do you know what would happen if, say, your VP of Finance found a more lucrative opportunity than your company offers? Not that we like to think about such things, but what if your business partner, who also serves as your functional head of marketing or technology, should succumb to a fatal illness? What if you yourself were to become incapacitated or pass away? If you can’t answer any of these questions decisively, it may be time to reexamine your long-term strategy and lay some groundwork to ensure your business will thrive—come what may.
The First Step: Succession Planning
Succession planning is a process companies undertake over a period of months, or even years. It involves a careful examination of the business functions and people that are critical to your organization’s operations. During succession planning, which is often spearheaded by a business’s chief officer of human resources, companies enumerate the skills an employee must have to perform at a high level in crucial employee roles. It entails assessing your current talent pool and identifying gaps in your present organizational structure. Who’d be next in line should a key functional leader leave your company? Does that person have the requisite skills to step immediately into his or her new role or should you implement a specific development program to make sure your chosen next-in-lines can assume their duties comfortably from the get-go? You may not be able to name successors from within your talent pool, in which case succession planning may involve adding new hires to your team.
What Are the Benefits of Succession Planning?
The benefits of succession planning aren’t limited to human resources decisions. The process can help you identify your company’s strengths and weaknesses in multiple areas. The intelligence you gather during succession planning may well lead to your re-evaluating and updating many aspects of your business strategy. As many successful business leaders will attest, strategic planning must be a dynamic undertaking. Responding to changes in your specific market and general economic conditions is imperative if you want to remain competitive.
Some companies find it difficult to bring the high level of objectivity that’s required to make succession planning constructive. Involving your whole team can help. The larger the group of informed and experienced voices you bring to the table, the more productive the process can be. But some companies may decide to bring in an impartial outsider to facilitate the succession planning process. Family-owned and operated businesses are among the companies that can benefit greatly by hiring a succession planning consulting firm.
The Next Step: Succession Plan Implementation
Strong succession plans should have the support of your company’s entire leadership team. But business leaders have been known to change their minds, particularly in the event of a crisis like the departure or death of a business partner. Making your succession plan legally binding is the next step you should take toward securing your succession plan.
An attorney who specializes in succession planning can be your greatest ally as you map out the future of your business. For one thing, he or she can help you think through and codify your succession planning goals. You can get help with planning for many scenarios, including some you may not have thought of on your own. An attorney can then draft a wide variety of contracts for you that will set your succession plan in stone.
Financial Incentives for Key Employees
The tools you select to strengthen your succession plan will vary, of course, depending on your goals. Let’s say your VP of sales is the bedrock of your business. Without his or her energy and expertise, you’re certain your business would flounder. Your succession plan might incentivize your company lynchpin to remain with the business regardless of any sudden leadership changes. A straight bonus or even a transfer of some ownership interest in the business are two ways you might entice a key employee to stay with your company. Bear in mind, a key employee isn’t going to be persuaded to remain with a company based on a promise. But they will respect a legal contract drawn up by an attorney who is well versed in business law.
Buy-Sell Agreements Among Partners
Buy-sell agreements are another way of guaranteeing a business’ succession plan will be followed. They’re used in both small and large business partnerships. They protect all owners of a company. Buy-sell agreements govern how a business will be divided when a partner leaves the organization. The document typically sets the price at which a partner’s interest in a company will be sold for. They can be crafted to function under various circumstances, but one of the most common ways they’re used is to ensure a smooth ownership transition should a business partner die. Frequently, buy-sell agreements are funded by mutual business life insurance policies. These policies are owned by the business entity and the business pays the premium. When a business owner dies and his or her portion of the business passes to a family member, partners can use the proceeds of a business life policy to purchase the deceased’s share of the business from a spouse or other heir.
Get the Expert Advice You Need
Remember, successful businesses are often more vulnerable than they appear. Conflicts are common and our law firm is dedicated to helping you resolve them. But conflicts are often avoidable, too, with proper planning. Contact our firm today to discuss the legal agreements that currently—or should be in place—to protect your business interests now and in the future.
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide range of topics, including finance, human resources, and government affairs. Follow her on Twitter @branddoktor.