NFIB

Succession Strategy: Plan in the Beginning or Risk Losing in the End
03/ 23/ 2004

by Jeffrey Moses

When two or more partners are involved in the creation of their new company, they're almost always enthusiastic and optimistic. This is as it should be, and as a result there is a natural inclination to avoid all thoughts about what could end the partnership 30, 40 or more years down the road.

But many financial and strategic management experts believe that planning a succession strategy or dissolution strategy for a partnership is just as important as planning for the growth of a new company. Jim Altfeld of Altfeld Inc., a strategic planning and consulting firm in Burbank, Calif., has had extensive experience working with partnerships experiencing dissolution problems. He insists that planning for the company's ultimate dissolution should accompany creation of the new company's first business plan.

Altfeld explains: "Two Latin words I always tell people in regard to business partnerships are: Memento mori. This means 'Remember that you are mortal.' Eventually, even the most successful partnerships end. And unless the end is planned for well in advance, tremendous troubles can ensue."

Altfeld says that people feel they're immortal, and that everything will continue on as it always has. "But after two or more people have been in partnership for decades, they sometimes get tired of each other -- and even of the business. So the company begins to unravel. It doesn't matter if the partners are brothers, close friends or distant cousins; if they don't have an exit strategy in place, things can get ugly."

He uses as an example an instance in which one partner of the company suddenly dies. The deceased partner's wife and family will need to continue receiving income from the company, just as before the death. But when no plan for continuing compensation has been put in place, problems will emerge.

A second example is when a partner becomes disabled and can't continue contributing to the company. What happens to the finances of the partner, the partner's spouse and the heirs? Who determines how much money continues to be given to them, or even if money continues to be given?

"Far too often when the exit strategy has not been defined," Altfeld points out, "the partner's heirs bring in their attorneys. That's when the horror stories begin. Then three other Latin words come into play: Ubi est mea? That means: 'Where's mine?' Without an exit plan in place, the situation can break down into a 'he said, she said' situation, with no firm ground for anyone to stand on. The attorneys are the only ones that benefit when this happens. That's why succession should begin the day the company is planned. The succession plan should state exactly what happens when the end comes."

Altfeld advises partners not to involve their attorneys during the planning of the succession strategy. "Hire an experienced succession or strategic planner and spend several days off-site to form the plan," he says. "The facilitator of the meeting should be an objective third party, who will ask provocative questions. Form the plan, and then each partner can take the plan to his or her attorney to make sure it's legal and binding. The succession plan itself does not need an attorney, only the agreement. Once the agreement gets into the hands of attorneys, each partner should keep in mind that the attorneys will be (looking) out for the best (interest) of their clients -- but that the partners must realize that the partnership may require compromise and mutual understanding."

Key issues to consider in the succession plan include, among others:

* What happens in case of disability or death of one or more partners? Do they continue to be paid even though they're not contributing? Do wives and heirs continue to be paid?

* When does payment start?

* How long does payment continue?

* Who takes over as managing partner?

* How do partners sell the company?

* How does a partner sell his/her portion and does the other partner have first right of refusal?

* What are rights for partners to buy each other out?

* How do partners evaluate the worth of the company?

* Which heirs come into the business?

Experienced succession planners understand that there are variables to help determine the answers to all these questions. For example, when a partner becomes disabled, the company may continue to pay the partner for one year, two years or longer, depending on how long the company has been in business and how much the partner has contributed. These issues and others must be determined among the partners.

Ironically, unsuccessful companies usually aren't as confusing and painful to dissolve as successful companies. There are state and federal laws for partnerships that fail and have debts, so the process is often straightforward. But when successful companies end, the finances become fair game for successors.

People may not want to think about the end when starting a new company, but planning a partnership's exit strategy should not be looked at as a negative. Rather, it should be thought of as a positive, to plan for the end so all the partners' work remains an asset for successors, not a source of financial loss, frustration and emotional pain.

NFIB member Jim Altfeld can be reached at jaltfeld@altfeldinc.com. His Web site, www.altfeldinc.com, contains information for business owners and managers. His recent book, The Owner's Manual, goes into great detail about creating strategies to ensure that company owners can exit their businesses without the company's operations suffering or breaking down.