FARGO - Business owners plan and adapt to a lot of things for their day to day operations.

But what often gets lost in the churn of attracting customers, increasing sales and making payroll, is how to make sure a business can survive the loss of a founder or top leader, and grow to the next level.

Whether it’s a small business or a major conglomerate, abrupt change at the top can be a body blow.

And life is full of those changes: death, disability, divorce, disagreements, departure.

They all can leave a business or organization hamstrung if there is no succession plan for an orderly handoff to a new leadership team, experts say.

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“I think it’s really a critical management error if you don’t have a succession plan in place, whether for yourself or for any key employee within your business,” says Al Haut, district director of the Small Business Administration in North Dakota. “I can’t stress enough how important the planning process is ahead of time.”

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Every business needs an advisory team or group, made up at a minimum of an attorney, an accountant, and an insurance professional, Haut said. They can structure a plan or package of measures that gets triggered by the death, incapacity or departure of a key member of a business’s team.

“Especially when you look at partners. If one partner dies, then how does the remaining partner compensate the family of the deceased partner? What does the management control look like once that partner dies? What you don’t want to see is a struggle for control of the company. So, you should have a plan that says, 'This is what happens. (These are) the steps we need to follow if one of our partners dies,’” Haut said.

Al Haut
Al Haut

Other experts would say that the roundtable group should also include a business appraiser, a banker, an estate planner and a financial adviser.

‘You can’t plan too soon’

“(Succession is) a very important question and one that we try to visit with our clients consistently about. It’s a topic people like to push off. It’s hard for them to kind of think about what their succession might look like, or what their retirement or selling the business or transferring the business” might look like, said Chad Flanagan, the partner in charge for the Fargo office of Eide Bailly and an expert on business valuation.

The risk of a firm or organization losing money, market share or closing “increases greatly without planning,” Flanagan said, while a good succession plan makes a company more valuable.

Chad Flanagan
Chad Flanagan

“We see clients that do the work and do the planning, sometimes it takes three, five, 10 years, to do the planning. But their chances of a smooth succession go up,” Flanagan said. “If you have 10 years or more of planning, your chances of success are about 85%.”

Flanagan said there are three ways for a business or organization to transition.

One is to have family take over, another is to sell to employees (perhaps with an employee stock ownership plan), or to sell to an outside party.

“Those three have completely different strategies and take time to put into place,” Flanagan said.

The goal is to avoid a scramble to keep things running.

“We kind of cringe when we get a client who comes in and says I want to retire in three months. We wish they would have come in three years (earlier) instead. It takes time because there’s a lot to do. There’s a lot to do in preparing the management team. You want to make sure you have the management depth to take on the company. The right people in the right spot,” Flanagan said.

In addition, if the business owner has been the face of the business for a long time, “it takes some time to transfer that confidence to that next management team,” Flanagan said.

Another point to consider is whether the boss is prepared to move on. Sometimes, business owners or top executives aren’t mentally prepared to transition to something else, such as retirement.

“It’s thrust upon them. It’s very difficult. They need to start thinking what the next chapter in their life looks like. Are they ready ? Do they have a hard time going on vacation? Are they antsy to get back to the business? … Are they mentally prepared to transition?” Flanagan said.

But a transition is inevitable, for everyone and every business or organization, Flanagan said.

“One hundred percent of businesses need to transition, because not everybody lives forever. It absolutely will happen. Even those that work into the 70s or 80s, eventually will need to transition,” Flanagan said. “You can’t plan too soon.”

Become ‘you proof’

That is especially true as Baby Boomers continue their march into retirement, said Zach Schnitzler, an insurance specialist for Eide Bailly Financial Services.

“With the Baby Boomer generation being the biggest generation, we’re in for one of the biggest transfers of wealth in the next 10 to 15 years ever,” Schnitzler said.

Zach Schnitzler
Zach SchnitzlerPhoto courtesy of Eide Bailly

The trick is to get business owners to stop procrastinating on planning for a change that no longer includes them, Schnitzler said.

While many transition agreements cover death or departure, other trigger events include disability, divorce or disagreements.

Life insurance can cover the death of a partner, and provide the liquidity to allow the other partner or partners to buy an estate’s share out.

The possibility of disability while working are “far greater than that of a death,” and insurance can help there, too, Schnitzler said.

Schnitzler has seen what can happen without a good transition plan.

One family business had been run by the father, who became very ill. It then fell to his wife to run the business, but she didn’t have the expertise to be the decision maker. The end was “a little bit of a fire sale” for the business because the spouse didn’t have enough knowledge to run it, Schnitzler said.

“I don’t want to say they got taken advantage of, but potential buyers know there is desperation, and that can happen,” he said.

That’s why it’s key to make a business “you proof,” Schnitzler said.

Recruiting, retaining and rewarding top employees who can step in for the loss of a senior manager is important, and key person life and disability insurance all help preserve a business’s value.

“I can’t say how many business owners I’ve talked to that say they have a plan, but it’s in their minds. It doesn’t happen if it’s not on paper,” Schnitzler said.

Time to test options

Getting it down on paper is Corey Elmer’s expertise.

Elmer, an attorney at Vogel Law Firm, said his role is to make sure that a transition plan can hold up legally.

He sees himself as the quarterback of a transition, bringing together the work of the others on a transition team.

He, too, sees clients who put off succession planning too long.

Cory Elmer (Photo courtesy Vogel Law Firm)
Cory Elmer (Photo courtesy Vogel Law Firm)

“The challenge is that most business owners are busy. They’re running their business day-to-day. And it’s awfully hard to think about something … when you want to make payroll and get the sales made today, that’s the challenge,” Elmer said. “Plus, these business owners have often built this business, either from scratch, or built it up in some other way, and they’re often invested in it. This is their identity, it’s awfully hard to let that go," Elmer said.

“It takes time to find the right successor, whoever that may be, whether it’s an employee or family or purchaser. And the first attempt at finding that successor may not work out. An owner may think that his or her son or daughter may be perfect for the business, and that child may not want to do it or be capable,” Elmer said.

“Or the employer may think a key employee may be a good fit. And that may not pan out either. And those things might not be evident right away. It might take a bit of time as things are planned and transitions are talked about, to realize these folks may not be the ones that can do the job in the end. That’s why planning in advance of three, five, seven years is a good idea, because it just takes time to find the right strategy and the right person or buyer,” Elmer said.

Elmer said his job is to work with the client’s bankers and accountants to be sure that the transaction is structured to succeed, the documents are set up, and that the sale fits his client’s financial needs.

“In my role I never want to do anything with a business succession plan that’s going to surprise the accountant, the banker or the estate planner,” Elmer said.