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Succession Planning: A Requirement for Fiscal Fitness

March 18, 2013

David B. Rosenthal, CPA
Partner

Time is passing — and there is no stopping it — but as business professionals we can plan for the changes that it brings.

Whether your goal is staying competitive and profitable now or creating an exit plan that will make the eventual transition to new owners as seamless as possible, there is no substitute for fiscal fitness. This is true especially for family owned operations.

Planning for the near future may be considered routine, but to stay successful over generations it is imperative to prepare for many contingencies, including retirement of owners. Nonetheless, succession planning is not necessarily a top priority for many business owners who, as baby boomers, are nearing retirement age.

An initial key element of this plan is knowing the value of your company – the basis for all successful transition strategies. In addition to maintaining a current and comprehensive analysis of the value of a company, fiscal fitness also requires that owners know the key drivers for their specialty. This could be billable hours for accounting firms, direct labor hours for manufacturers or the best ways to retain clients and acquire new ones.

Turning this concept into reality requires taking stock of your company on a regular basis, certainly no less than monthly, but even weekly or daily if possible. Company staff should have the requisite qualifications to prepare monthly statements that, in the aggregate, will be the basis for your year-end reports. A business owner should also ensure that his/her company's financial technology is up to the task and meets the requirements of its daily operations and future plans.

Since financial issues are at the heart of every business decision, it is also important to stay in regular contact with bankers and other financial advisers. Unwelcome surprises should not be part of the financial landscape, and will not be if owners make a concerted effort to stay informed. Regular communications can help business owners determine the level of assurance needed on financial statements, whether that assurance requires simple reviews or full-fledged audits.

Even routine actions, such as opening and reading bank statements, can be a valuable source of information regarding a company's overall financial picture that is often is overlooked.

Staying abreast of a changing business landscape can be easier if owners consider forming an advisory board of outside experts to provide insight on the state of their industries. These experts can give your firm valuable advice that may not be readily available from internal sources. The knowledge and expertise provided by an advisory board can be a welcome supplement to information gleaned from trade publications, peer groups and industry conferences, for example.

It is also important to maintain regular interaction between the company ownership, the advisors and key management. Regular communication opens channels to all departments and can provide crucial input on the state of daily operations.

Once the senior management is confident of the company's ongoing operations, it is never too early to know the exit plan – both for a planned transition or an untimely event. This plan should take into account whether the desired transition is a sale, transfer to the next generation, an initial public offering (IPO), internal sale to management or an employee stock ownership plan (ESOP).

Company owners and management should understand the steps involved in each. Knowing where you want to go will help in developing the strategy on how to get there, especially by keeping in mind the dual goals of appropriate transfer of company ownership and financial security for the current owners. It is crucial that all personnel involved in a potential transfer of ownership know the plan, and there are buy/sell agreements and adequate insurance in place.

Planning for a seamless and predictable transition is obviously the desired path to long-term success but, as unpleasant as the concept may be, it is also wise to prepare for an untimely event, such as the death or disability of key personnel. Successful business owners know that they must have contingency plans for the unexpected as well as the predictable.

Leaving a legacy that goes beyond the annual report is possible if we face all scenarios squarely and plan accordingly. A great way to ensure that the contributions of an owner or key executive will be acknowledged in the future is to plan now for the day when he/she will no longer be there to make the hard decisions that keep the business thriving.

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