Most small businesses today don’t have a documented succession plan in place. The owners know that they need to do something, but they lack the proper planning and follow-through on implementation. If you are eventually going to stop what you are doing and go do something else, you need to plan for a successful and smooth transition.
What happens if you don’t have a succession plan in place?
- Your practice may experience severe disruptions to operations and cash flow, while someone else is trying to stabilize the business.
- There most likely will be an exodus of clients. Since they did not pick the successor and do not have a relationship with that person, clients have no compelling reason, other than convenience, to continue working with the legacy practice.
- Without proper processes, procedures, or controls, your practice will not survive a succession, and it will be out of business in a short period of time.
When starting to build a results-driven succession plan, it is best to get the right team members in the right roles, and then focus on the alternative ways to get to your destination in the most controllable way possible. To maximize firm value, there needs to be a defined plan for client retention and rewards for that retention.
Once you know what it is going to take to maximize the value in each stage, it is then possible to create the right types of relationships and determine who the best potential suitors would be for your practice. Does it make sense to create some form of internal succession planning, or look outside to acquire or merge with a larger or smaller firm, who could buy you out over a set period of time? Maybe it makes more sense to piece out your client base and use the total value of each individual client’s overall relationship, versus simply looking at their current revenue stream to maximize their value.. Maybe it makes sense to enter into solicitor arrangements or create continuation agreements with other like-minded professionals who would want to help you liquidate your practice one client at a time.
Eight key items you need to have in proper succession planning
- You need a plan for the inevitable liquidating event. Someone is going to have to deal with the eventual transition of your business. It is either going to be you or your estate. You should have at least a 10-year transitional planning process, normally done in two five-year phases. This will give you enough time to ensure the maximum value and to create the optimal retirement cash-flow replication for yourself and your family.
- Remember that succession planning is meant to help maximize the eventual liquidation of your ownership within the practice. Now there are qualitative reasons you would want to see your legacy continue, and you want to ensure protection of your staff and employees.
- With proper succession planning, you will focus on skills that are needed to fill each role. Focus on who will take over leadership, who will be in charge of growth, who will work to keep employees retained, and what compensation arrangements make the most sense for maximizing the value of the practice.
- Focus on strategic vision and determine what five areas you want to dominate in your sphere of influence. When you plan for what the results should look like, it makes it easier for everyone in the transition.
- Have the right procedures in place so that everyone knows what it takes to do his or her job and how people are rewarded for exceeding known and agreed-upon compensation metrics.
- Get everyone involved. If successors are allowed to participate in the design of their future, they are more inclined to want to see it through to success.
- Create a battle plan. If this happens, do this. If that happens, do that. This would be an enterprise “What-If” analysis looking at the economic, operational, social, and structural impacts within sudden leadership changes through out your entire practice. You want your firm to have the tools to know how to act and respond when you are no longer available to answer questions and make key decisions.
- Have measurable controllable results. This is going to be accomplished by three types of tactics:
- Cash-flow replication: When can I replace 100 percent of my current cash flow? What are all of my liquidating transaction options? How can I use the current firm’s resources to ensure a smooth financial transition?
- Organic and transferred client growth: How will the client base be properly transitioned over a controlled educational period? How will younger staff be given career progression and access to career tracks based on their future roles within the practice?
- Growing future owners: Who wants to lead the practice to the next level? What will be our next strategic move, where do we see the more profitable sustainable cash flow streams coming from in the next five- and 10-year periods? What options are available for who will be involved in the liquidating transaction?
Is your model working? Are you able to create the most cash flow from the least assets? This may be your opportunity to maximize the operational efficiency within your practice and use your additional resources to create opportunities for your staff or other suitors to finance a pension plan as your liquidating transaction. Every business is going to have to deal with the fact that eventually there will be a change of ownership. Pretending that this is not going to happen is not a realistic option for you or for your clients. This might be a great opportunity to build it back better, and then offer this as an additional billing opportunity to your clients who may also be dealing with liquidating distribution.
You need help to develop liquidity options within your practice and create your own private pension paycheck. You need help to develop strategies to protect the value of your firm during the transition. Now is the time to get your plan in order so that you can utilize all of your resources to maximize your liquidating distribution, before it is too late.
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