Does My Business Need a Management Succession Plan?

A selection from "Your multimillion Dollar Exit"

“You must plan for the inevitable from the beginning; otherwise, you will be leaving your family with potentially nothing or a heck of a lot less than what they could have received.”

Wayne Zell, Your Multimillion Dollar Exit (page 5).

A Management Succession Plan (MSP) is a vital component of your Business Success(ion)™ plan. It determines who will run your business if you face an unexpected exit, either by death or incapacity. A well-executed Management Succession Plan features thoughtful short- and long-term strategies to attain your desired outcomes.

Q: When is the right time to begin Management Succession Planning (MSP)?

A: NOW.
It is inevitable that you will exit your business at one point or another. The uncertainty lies in when your exit will occur. Management Succession Planning protects your business and your family against the risk of an unexpected exit.

If your unexpected exit becomes a reality, your business will face crisis. A Management Succession Plan provides your business with a clear roadmap to navigate the crisis. Without this roadmap, your legacy could be at risk.

Q: How does a Management Succession Plan (MSP) control my company if I am not there?
A: Your MSP sets out:

  • The roles of any future board members and management staff
  • The terms of participation or engagement in business activities
  • Their compensation, potential bonuses and benefits, and
  • Enforces any nondisclosure provisions.

Q: How is a Management Succession Plan (MSP) structured?

A: Your Management Succession Plan (MSP) has two components that address different timelines.
 

  1. IMMEDIATE (0 to 3 months):
    What happens following your incapacity immediately. This component consists of two steps:

    a. Naming a board of directors (or a board of managers for an LLC).
    The board will govern your business following your unexpected exit. Board members should include:
  • Your revocable trust’s Trustee that will control your ownership interest in the business.
  • One or more family members (may or may not be your trustee).
  • Two or three of your trusted advisors (may include your attorney, CPA, and/or business advisor with familiarity of your business).
  • Or you could name a board of advisors instead of a board of directors (or board of managers). The structure of a board of advisors is less formal than a board of directors, eliminating the need for the board members to act in a fiduciary capacity. This reduces business-related risks for the advisors, but they are also compensated less than directors.

    b. Naming your company’s future officers or managers.
    The officers or managers, such as president, CFO, COO, controller, etc., will manage day-to-day business operations following your exit.

    If your current employees are ideally suited for this, you can enable the chair of the board of directors to negotiate their employment agreements. This can give your current employees security and incentives to stay with the business.
  1. BEYOND 3-6 months but before your planned exit:
    The longer-term portion of your MSP outlines what should occur beyond the 3-6 months after you die or become disabled, but before your long-term ideal exit plan applies.
     
    • This MSP component may empower your board to interview and hire an investment banker, business broker, and other professionals to help the sale of your business or its assets.
    • Your MSP could allow your board to hire a replacement executive team to run the business if a sale is not feasible.

Q: What are the risks of a poorly designed Management Succession Plan(MSP)?

A: There are many potential downsides to a poorly designed MSP. Key risks include:

  • Loss of business.
  • Loss of key talent.
  • Power struggles at the board and management level.

Q: What can I do if the Trustee of my estate doesn’t know how to run my business?
A: There are ways to mitigate the risk of a trustee that is not ideal. For example, you can limit the veto power of a singular trustee by expanding the list of trustees. Or, you could give the trustee only one out of the numerous votes of the board that your MSP will create.

Q: How do I ensure my Management Succession Plan (MSP)will be enacted as I intended?

A: Your revocable trust (part of your estate plan) should legally bind the Trustee to the management succession plan (MSP), which may include voting in favor of the board members and officers in the plan.

You can also bind the board to follow your short-term plan to provide instant company stability.

Developing a Management Succession Plan (MSP) for your business is a critical, although not urgent, so most people don’t have one. Creating an MSP diverts your attention from present, pressing business needs and raises deep questions that are difficult to answer. However, it will immediately decrease the risks to your family, legacy, and business and outweighs any effort required to establish a Management Succession Plan.

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