Published in Finance

Avoiding ‘nightmare’ succession scenarios requires pre-planning, advisers say

BY Sunday, March 31, 2019 10:43pm

Life happens. So does death.

Professional advisers say business owners need to prepare for what happens to their companies in the event they’re taken out of commission by a sudden life-changing event — such as an illness or injury that leaves them incapacitated or debilitated, or worse. Even if an owner experiences a personal crisis that takes him away from the business for an extended period, it can have crushing effects on the company, especially without prior planning, advisers say.

Nick Reister, an attorney who chairs the trust and estates group at Smith Haughey Rice & Roegge PC in Grand Rapids, tells the story of a company whose owner died suddenly. His surviving spouse from a blended family “had only basic knowledge of the company,” Reister said.

The situation became a “nightmare scenario” because the owner lacked any plan or instructions on what should occur or who should take over if something happened to him. As well, the company’s corporate documents and records were not in good order. The resulting uncertainty left employees uneasy. Some began looking for work elsewhere, and competitors saw an opportunity to pounce.

“That business was really left vulnerable. His competitors were able to swoop in and pick off employees and pick off customer relationships,” Reister said. “A lot of that could have been avoided.”

The scenario can occur as business owners get caught up in the day-to-day operations and put off planning for the void that can occur in their absence, a situation compounded when they also hold details about the company close to the chest, according to business planning advisers.

“The people who are left to pick up the pieces have to decode all of that and turn it into something they can understand and build a plan from,” Reister said.

Businesses formed as partnerships should plan for the possibility of the sudden death of a key partner, cases in which the person can no longer contribute to the operation, or instances in which a person decides suddenly to depart.

Reister and other advisers say business owners need to include contingency planning in their routines when thinking about the future. Doing so will enable a business to transition and recover much more smoothly without them.

“It has to become part of the regular routines of business owners to be touching base on that, just like they need to give attention to financing or their banking or their vision for the company,” Reister said. “They need to add this to their list of regular check-up items to make sure that they don’t get too far behind.”

In forming a contingency plan for continuing the business — and navigating the crisis and transitioning to new leadership in their absence — owners should identify key managers who can quickly step up and take over.

Whoever gets thrust into the lead position should quickly gather key managers and employees as well as attorneys and accountants who have knowledge and insight into the business and can help diagnose the situation and guide the company through the crisis.

“They will have perspectives on what’s going on that are often difficult to find. When you’re in the middle of a storm, it’s difficult to see that perspective,” said Eric Larson, a partner at Beene Garter LLP in Grand Rapids.

“We as advisers have been telling folks for a long time you need to think about these things,” he said.

Successors following a contingency plan also should reach out to vendors and clients to reassure them that “everything’s in good hands, that things are going to continue to run smoothly,” said attorney Bryan Reeder of Plachta, Murphy & Associates PC in Grand Rapids.

Reeder once had a client whose husband died suddenly and customers of his business “just started to jump ship because they still needed product. They went to the next competitor in the market.”

“We were as proactive as possible to contact those companies and reassure them that they still will receive their product, and ‘we’re on top of this, we’re still running the business,’” Reeder said.

If business owners do not plan ahead for worst-case scenarios, the managers who take over can find themselves at a disadvantage if they ultimately opt to put the company on the market.

“It’s easy to sweep it aside and say, ‘I’ll deal with that tomorrow,’’’ Reister said. “But there’s some false comfort in that because you never know when tomorrow comes and all of a sudden you’re forced into a sale, all of a sudden you’re in a corner.”

Read 2575 times Last modified on Monday, 23 September 2019 15:31