Eubel Brady & Suttman Asset Management, Inc

YouTube has become a go-to resource that enables an interested person to gain beginner or advanced knowledge on many topics. The demographic timeline of the baby boomer generation has increased YouTube posts on succession.  However, we are not convinced the majority of these posts provide a fundamental understanding of just what encompasses “business succession.”  The challenges facing a business owner are to (1) achieve clarity about what makes up succession; (2) define a personalized ideal state for his/her own succession; and (3) execute this vision. Our observation is that tackling the challenges of succession is among the list of things that are most likely to be procrastinated. So, why is that?

Among the reasons for procrastination on succession typically include the following:

  • Once In A Lifetime Event. Succession is a once in a lifetime undertaking for most business owners. Usually when we tread on unfamiliar ground, caution is a natural instinct since there is no experiential reference to rely upon to get started.
  • Natural Behavior. This is a big factor in our experience. The natural behavior of most successful entrepreneurs does not lend itself to deferring to others to take the lead. This may explain why a well known study found that less than one in ten private businesses make it to a third generation.
  • Lack of Time. The nature of the time demands to run most private businesses does not allow time to plan and then execute an ideal succession plan to lay the groundwork for a desired transition.
  • No Clear Successor. If there is not a clear successor, it is hard to visualize how a business might carry forward without the current leader. This makes it difficult to see a future that is acceptable to the current generation of leadership.
  • Standard of Living. The proceeds from an exit sale may not be sufficient to allow the business owner to maintain an acceptable standard of living solely from reinvesting the after-tax proceeds.

In our next blog, we will explore how to counter each of these roadblocks to create what we believe to be  an ideal state of succession (what we also refer to as a Succession Blueprint). However, the third factor above is worthy of mention today. An owner who also works in the business, can easily lose control of a daily priority list that includes time for succession. “Stuff” happens during the day with employees, customers, suppliers, and other outside forces that make it easy to push succession related to-dos to future dates, especially when the owner is heavily involved in working in the business. To address any of the roadblocks, a business owner must make it a priority to dedicate sufficient time to work on the succession process.  

Equally worthy of mention is natural behavior and how it may impact making time for succession a priority. There is a potent force at work that leads to succession being de-prioritized. A conflict ensues when the owner’s natural behavior to have a meaningful impact on his/her business is suddenly at risk when he/she considers what could be real succession alternatives. Many businesspeople have their personal identity and self-image deeply intertwined with their business. Merely contemplating this separation can freeze one’s decision-making process. This frozen state of decision making may thaw when a key employee comes forward with a desire for ownership or the owner becomes increasingly dissatisfied with the daily grind. Sometimes the thaw of the decision may be abrupt, such as when there is a sudden decline in the health of the owner.   We close with an extreme but true succession-related gone wrong story around this combination of behavioral challenge and difficulty of finding time to act. John is the owner of CPA firm and is well-respected in his regional business community. John’s client, a business owner, passed away unexpectedly without a written succession plan for his business, and his estate plan was outdated. John was summoned to appear in court because he knew more about the decedent’s business and its financial state than anyone else working at the business, including the decedent’s daughter. Although the decedent’s daughter was the intended successor, she was hampered in moving forward by her father’s failure to share financial information and establish clear succession and estate plans that would have clearly transferred the business to her control.  The daughter was also fighting an executor whose interest was aligned with the ex-wife of the deceased due to the outdated estate plan.  Although there is a tendency to feel like there is all the time in the world to address succession sometime in the future, all too often events occur that thaw the frozen state of decision making at a time when it is too late to adequately plan.