I am often asked, What is succession planning, and why should a business have succession plans in place?
I view succession planning as an integrated planning process that over time enables informed decision-making to establish three primary plans:
- Wealth Transfer Plan – the transferring of business ownership (and therefore wealth) through gift or sale
- Management Succession Plan – the identification of and then eventual empowering of new management leadership
- Ownership Control Transfer Plan – the planned transferring of voting control of the business based on succession objectives
Effective succession plans typically integrate and synchronize with other key dealer and business arrangements. Examples include owner and family member estate plans, ownership transfer agreements, franchise/factory agreement dealer and successor dealer designations, lender arrangements like personal debt guarantees and collateral arrangements, and life insurance ownership and beneficiary designations.
Below I present the top ten reasons why dealers and their families, employees, lenders, and franchisors like succession planning.
- Indicate the dealer is addressing important business long-term matters. Often, long-term planning requires intentionality as it is not naturally intuitive or urgent like ingrained short-term operational planning that responds to monthly operational results and challenges.
- Define, document and communicate the dealer’s intentions. It is in the best interest of all stakeholders (dealer, family members, employees, owners, lenders or the factory) to understand the plans well in advance of the occurrence of a succession event, planned or unplanned.
- Enable on-going, timely, systematic and graceful facilitation in addressing succession-related emotions such as procrastination, family dynamics, and long-term business decisions. For instance, if there is a planned management successor, there should be milestone development measurements in place. If management successor development is lagging, it is more effective to address such indications sooner than later.
- Ensure the dealer has addressed the difficult decisions. Leaving such decisions to the family can lead to costly loss of business focus and family, employee and management disharmony. These dynamics are real and important to manage. The result is a dealership operation that is fully in-sync with defined dealer personal and business objectives that will enable achievement of sustainable, high-level operating results.
- Help create future flexibility and options for what is best for the family. It is critical to understand that succession planning is a process that formulates a current direction with ongoing refinement or modification over time. Successful plans enable owner/ family member end-game flexibility by yielding multiple and enhanced choices, such as selling the business for a higher price, owning and controlling the business with professional management, owning the business with a family member controlling and managing the business, or selling control of the business to private equity investors and keeping a minority investment stake to participate in the buyer’s success.
- Preserve the business legacy and reputation. After a lifetime of proactively building and protecting the business and its brand, it is logical to also proactively address major long-term business decisions like succession events.
- Protect the business operational cash flow, business value, and equity. Lack of viable plans may lead to unnecessary tax burdens, forced asset liquidations, and unnecessary factory or lender demands. A succession planning financial objective is to enable and provide the liquidity necessary to implement plans without undue hardship.
- Integrate with estate and gift tax planning strategies to protect family wealth and ongoing income and business capital. Dealerships have high-value intangible assets and real estate assets. There are significant transfer planning opportunities that can reduce taxes by more than 50% of non-optimized transfer taxes. It is a must to include capable and experienced business valuation and tax advisors on the succession planning team.
- Mitigate transition period risk. There are several risks associated with succession events including retirement, death or incapacity of a dealer or key manager; transfer of business control; or transfer of dealership management leadership.
- Prevent business operational paralysis after a key succession event. If the succession plans are well thought out and documented, the transitions will not be bogged down by the need to research and make decisions on the fly. All stakeholders know in advance what is going to happen.
The dealership industry has numerous potential pitfalls and planning opportunities to address issues, including applicable state franchise and ownership transfers laws; franchise agreement succession provisions that may or may not align with state franchise laws; estate, gift and income tax planning opportunities; and franchise agreement minimum capital and operating performance requirements. Succession planning enables stakeholder confidence and commitment when done well and with the involvement of competent valuation, tax and legal advisors with dealership industry experience.