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Succession planning: the advisor's role

by Bethany A. Wood

Bethany A. Wood is assistant vice president of business owner's and women's markets, U.S. Insurance Group, MassMutual, Springfield, Mass. She can be reached at bwood@massmutual.com.

Small and family business owners generally do not prepare for succession as well as they could and, as a result, put their businesses' futures at risk.

For example, the 2007 American Family Business Survey conducted by Massachusetts Mutual Life Insurance Co., the Family Firm Institute and the Cox Family Enterprise Center at the Kennesaw State University Coles College of Business found that among family business owners who expect to retire in five years, only half have selected a successor. Of those expecting to retire in six to 11 years, less than a third have done so.

The cost of failing to plan can be substantial and is borne by more than just the business owner. Liquidations and forced sales can not only scuttle a business owner's retirement and legacy dreams, but also subject partners, colleagues, employees, clients, and family members to significant hardships.

Avoiding such dire consequences requires succession planning, and advisors play critical roles in helping business owners recognize the importance of succession strategies. Skilled advisors can evaluate the situation, assess the business, understand the history, review the financial condition, and learn about the business owner's requirements for continuing retirement income. They can bring experts to the table, attorneys, accountants and others, who are experienced in this area. They can help owners align business and personal planning issues, determine when it's time to step aside, identify a successor, and structure the succession in a way that enables the owner to enjoy the fruits of his labors while helping the successor extend the business' success. In the case of family businesses, financial professionals specifically trained to work with families, can help sort through sticky, and often emotional, family issues.

When to begin

It's never too early to begin helping your client formulate a succession plan. Without proper succession planning, a sudden disability or death could mean the end of the business your client has worked so hard to build, and severely impact the future of family and loved ones.

Sometimes, forward-looking business owners are open to these discussions early on. More often, owners can be so involved in day-to-day operations that they postpone such planning until they're approaching retirement. Succession can be a difficult and emotional decision and, as we know from human nature, hard decisions are more easily put off. But an owner who doesn't begin planning until it's too late is more likely to make rushed, bad decisions. Advisors have the duty to help owners lay the foundation for a good plan and prepare the successors and the companies for their departure.

A skilled advisor can help the business owner undertake an honest self-assessment of the need for a succession plan by posing probing questions:


At the same time, the advisor must help the owner consider successors. It's critical for the business owner to honestly assess the needs of the business, then match those needs to the successor's skills. Which of any number of skills are most needed to succeed?

Once you help the owner identify them, he or she can better marry the core competencies of the next generation's leader with the needs of the business.

Succession can be a difficult and emotional decision and, as we know from human nature, hard decisions are more easily put off.

When the owner has come to an understanding that developing a succession plan and identifying a successor is necessary, it's critical that he or she begin to discuss the planning process with those who will be most effected. All parties need to be honest about what they want. The exiting owner must be clear about his or her needs for ongoing income and/or retirement income from the business. Others who own a share of the company must speak up about what they want: A leadership role? A reward for having participated in the company's growth to date? And the successor must be clear about what he or she expects, as well.

For family businesses, this can be an especially tricky and trying process. Family businesses present special dynamics and emotions that aren't necessarily part of non-family businesses. It's important for the owner to have conversations with each family member, so each person's individual goals can be matched to the business' needs, and set expectations appropriately.

For example, a son or daughter actually might not want to be involved in the business but hasn't had the courage to speak up. Or he or she might not want the top job, preferring another leadership role. It's smart for the owner to have these conversations facilitated by someone who is not part of the family. An unbiased, unrelated advisor can make these conversations work for all involved.

Even when the plan is in place and retirement is imminent, the advisor can play yet another important role by making the owner aware of the need to let go of the reins. The worst thing the exiting owner can do is stay half-involved. An experienced advisor will help an owner understand the value in letting the next generation's leaders cut their teeth and grow the business in the way they think is best. An advisor can help the owner step back, happy to defer to the next generation and gratified to watch the growth and evolution of what he or she started.