Planning For Succession - 101 - May 2008

What’s your succession plan?

That's one of the biggest questions heard these days, as many professionals realize the time has come to begin planning their way out of their practice.

In fact, succession planning is the single biggest issue facing baby boomer professionals today. It's a big buzzword, and for good reason. The whole process of finding a successor and retiring from your practice is a complex process that can take anywhere from five to ten years to complete under the guidance of quite a few professional advisors.

Succession planning is challenging for everyone, but professionals face an even greater challenge -- their greatest asset is their creativity, their mind and their personal ability. When they leave the office, so do the assets. When they retire, those assets retire with them.

In this month’s newsletter, we begin by explaining the major elements involved in sucession planning - 'Succession Planning 101' so to speak. In future issues we'll delve into the various options for selling a firm and on ways of adding value.

To get started, we turned to four professionals: Susan Smith, a Management Consultant; Stuart Parkinson, a Certified Management Accountant; Christopher Nobes, a Business Valuator; and Sam Kohli, a Business Appraiser.

Oomph: How does succession planning work? Can you describe the basic approach to implementing a succession plan?

Susan Smith: Succession planning is the process of preparing for the departure of the owner[s] of a firm. A succession plan will outline when and how to leave. The biggest challenge for most owners is deciding what to do with their firm - whether it is selling the firm to outsiders, merging with a large firm, or passing the firm on to existing staff.

Stuart Parkinson: You need to prepare a life plan and a death plan. A life plan is based on a departure strategy that takes two potential outcomes into account. The first is based on a normal retirement. The second outcome is based on having to leave before you expect to due to sickness or disability. A death plan outlines the succession in the event of a sudden death.

I always advice clients to create strategies instead of specific tactics - let the tactics evolve from the strategy. Decide from the outset what you want to accomplish. Once you know your future objectives, your strategy devolves naturally. It's easier to deal with the specifics once you have a strategy in place.

Oomph: What are some key elements that professionals must take into account when planning for succession?

Susan Smith: The single most critical element is the building of value into the practice: this will determine how much money you get. This can be done by establishing a unique brand positioning, by transfering knowledge to employees through training, or by tranfering personal goodwill to the firm.

Sam Kohli: The greatest problem for professionals who are planning for succession lies in how to assign value to their intellectual property. In many professional firms, there are creative and intellectual assets that extend beyond what we traditionally consider assets. People loop all these assets in together and put them under the heading of goodwill. They’re soft assets, but they’re vital to the value of your business. If your greatest business asset is your brain, it leaves when you leave and your business is missing an important piece of its value. Combating that is challenging.

At the same time, you can leverage that issue with the fact that the goodwill you’ve created professionally will still remain to a degree. If you have a brand that’s worth something, if hundreds of people in your city know your firm and call you when they need you, the purchaser of your business gets those calls and those clients. While theoretically your ‘good name’ leaves when you do, the purchaser or your family still see residual benefits. They still add value to the business. And adding value is what it’s all about.

Christopher Nobes: The higher the monetary value of the practice, the more options you have. You’ll have more interested buyers, or if you’re passing the business on to employees or to the next generation of your family, you’ll have a much smoother transition. People are in business to make money and maximize value. Value maximization strategies should be part of the daily management of a firm.

Oomph: What other key elements of succession planning?

Christopher Nobes: There are two key components that should be in place long before you begin to plan for succession. The first is a properly structured estate plan with a tax-effective estate freeze . You should have your accountant prepare this many years, or even decades, in advance of the date of ownership succession. Ideally once a practice is established yet still expected to grow.  The second is a properly structured shareholders agreement with valuation and liquidity of the terms clear and well worded. Often, terms are too vague, and this is a mistake. By the time you figure out that you’ve worded it wrong, it’s too late"

Oomph: How much does it cost to create a succession plan? What specialists need to be involved?

Stuart Parkinson: For an average firm of about 15 people, creating a solid succession plan will cost between $30,000 and $50,000 because you’ll need to hire quite a lot of advisors to make the process go smoothly.

Some of the people you’ll want to talk to include legal advisors, tax accountants, insurance specialists, financial planners and consultants to co-ordinate and administer the process. Key elements need to be agreed upon by everyone, and that takes time.Some businesses offer a turnkey service for this, but most firms want to use professionals they already know, and who know them and their business.

Oomph: what else should people think about?

Susan Smith: Timing! Everybody leaves it way too late. You should begin thinking about succession the day you open your door.

Stuart Parkinson: Succession planning is very challenging because it forces people to confront their own mortality. The thing you’ve worked your whole life for is coming to a close, and you are naturally reluctant to deal with it.