By Mike
When starting and running a new company it is easy to focus on the present and quickly lose track of what may come in the future. This is not a bad thing – in fact the present is exactly where entrepreneurs should place most of their priorities and devote most of their energy. But as a company matures and strategic planning starts to concentrate more on the future, consideration should also be given to the future of the company’s administration, operations and financial structure and a succession planning process should be an important part of that. The word itself should provide some basic guidance; Merriam-Webster online defines “succession” as “the order in which or the conditions under which one person after another succeeds to a property, dignity, title, or throne.” Throne, you say?
While much of the literature on succession planning tends to be about long-term legal planning as well as the importance of valuation, buy/sell agreements, and tax and estate planning, my advice is that you first focus on what will happen tomorrow if you don’t have any plan already in place. The kind planning I want to discuss should be driven by a simple question: “If I get hit by a bus on the way to work today, what will happen?” Taking some time to ponder this simple question will lead you to some straightforward steps you can take to assure that your venture will continue on (triumphantly) during your days in the hospital. In other words, start planning for an emergency succession, then turn your focus to the longer term planning that should follow.
There are several immediately practical as well as the legal and financial questions that will arise immediately during your absence. On the practical/operational side, good succession planning should be designed to ensure that everything you are responsible for doing at your company will continue to get done – from paying the bills to maintaining the database and on down to taking out the trash. On the financial/legal side, this planning should be about making certain that the business can continue to operate effectively under its bylaws or operating agreement, that cash flow will will not be impacted by your absence, and that the resources are available to enable new hires or bring in outside assistance to make up for the loss of your personal capacity. Here is a list of 5 uncomplicated steps you can take this week to get things going.
1. Document. First and foremost take the time to make a list of the things you do every day that someone else will have to do in your absence. Are you responsible for payroll? Is there a marketing campaign underway that needs your daily attention? Are you the person who locks up at night and sets the alarm? Make sure that you carefully write down instructions for these things and that you know who will be the one to take these on. Simple cheat sheets can be incredibly helpful – just make sure that at least one other person knows where these reside and has access to them. Creating comprehensive written instructions is not so important for taking out the trash, but for more complex tasks such as accounting and finance functions, documentation is critical.
2. Insure. One way to make certain that you will have adequate cash to survive an emergency succession is to take out appropriate insurance policies. Many small businesses carry some type of “key person” policy which pays out in the event of the death to disability of a founder or CEO or other important employee. In the case of multiple founders running the company, matching policies can be set up to safeguard should something happen to any of these people. There are a number of factors that will drive the value of such a policy: business valuation, costs of hiring and training a replacement, and the lost revenue or business opportunities attributable to that person.
3. Train. Don’t overlook the importance of training other people in the company to take on whatever tasks will need doing. Each of us has specific knowledge about the tasks we perform everyday and it is dangerous to assume someone else will be able to pick up the reins while you are in that hospital bed. So my advice is to plan for redundancy and to identify the backup person for any given area of responsibility. Then be sure to give that person both the written instructions discussed above and, more helpful still, an opportunity to learn the task – let them watch you do it once or twice or, better yet, let them try it on their own with the help of that new cheat sheet.
4. Anticipate. In any succession, there will be many issues that inevitably result: conflicts and disputes can emerge between employees, investors, or other partners; a loss of confidence might take place for employees, clients, or creditors; potential tax exposure could also result for your family or partners. The point is to take some time now to consider what could happen in your absence and start considering steps you can take now to head off what could be potential problems later.
5. Clarify. Whether in legal documents or in your informal notes and cheat sheets be sure that all succession instructions are clearly defined. Issues such as the transfer of power and transfer of assets are important, but so are the little nitty-gritty operational details that must be seen to. During the early stages of starting your business there is typically very little strife or conflict between partners or investors, an succession emergency can bring out the worst kinds of discord and tension. A good succession plan accounts for all of the possible things that can go wrong – it should be an instruction manual for those left behind that clearly and in a detailed manner describes what happens now. Take the time to determine the issues and the terms to provide for the smoothest of transitions and it will pay off if and when the tie ever comes that you need it.
And, please remember to look both ways when you step off the curb.
