SUCCESSION PLAN Jack has the choice to choose one of the two sons or the nephew to be his successor to take over his business. Since he had decided to work for about six more years before retiring, he has six years to groom his successor. Jack will have to consider all possibilities before he choose one or all the three to be his successor. If he turns the business to all three of them collectively, he has to figure out how will he distribute the stake and responsibilities accordingly among the three. The job function, duties and accountabilities will need to be determined accordingly. In order to take over and run the business the successor need to have the capabilities of an entrepreneur. Some of main characteristics of an entrepreneur are personal initiative, the ability to consolidate resources, management skills, a desire for autonomy and risk taking. Other characteristics are aggressiveness, competitiveness, goal oriented behaviour, confidence, opportunistic behaviour, intuitiveness, reality-based actions, the ability to learn from mistakes and the ability to employ human resources skills. An entrepreneur successor is a person of high ingenuity, high creativity and strong drive. He should be able to provide critical ideas for new product development and future ventures. A Managerial successor is someone who is to take care of efficiency, internal control and effective use of resources. This person will often provides the stability and day-to-day direction needed to keep the business going. While the successor is form inside, the owner shall focus on the right candidate with the intent of gradually giving the person operational responsibilities followed by strategic power and ownership. The important factor is that the owner and the heir must get along and work together with other family members in the business who must learn to accept the new future boss. Jack should know some of the basic succession planning processes and options: Successful Succession Planning Succession planning is not an easy process. Discussing succession with your family brings up difficult issues like aging, loss of control of your business and your financial affairs, and death. These selling features don’t make succession planning very popular. However, if one of your life goals is to transfer a viable business to your child or children, then succession becomes an issue in much of how you do business and how you plan your life. There are a number of factors that make within family transfers businesses easier. Families that have a history of successful transfers have a family model that works for them. Family business skills like goal setting, open communication, planning for decision making, using outside advisors, wealth management, training successors, and retirement planning all help position the family and the business for successful transfer to the next generation. Goal Setting: Your long term vision feeds goal setting. Goals then provide direction. If you can’t see where you’re going how will you ever know if you get there? Start early: Build some outside investments to support you in retirement. These days, most within family transfers occur at prices well below fair market value. Some other save investments may help to ease the cash flow crisis at transfer. Business Viability: Profitability is critical. It is pointless to talk about transferring an unprofitable business to the next generation. Parents need income to support them in their retirement years. The money has to come from active business income (payments from your children), or from the sale of the business. Manage the Business Capital: Invest the business profits in the right assets. It is difficult to get any money back out of high cost overhead items. Keep the business lean and get some capital invested off the main business. Tools for Security and Estate Planning: Take advantage of the legal tools that are available to give you some control of your assets in the event of incapacity or untimely death. Powers of attorney for property and for personal care allow you to put decisions you would normally make into the hands of a person you trust in the event you are incapacitated. An up to date will provides a backup transfer plan in the event of untimely death. Dying without a will (intestate succession) puts your assets into the control of the legal authorities for distribution. Do you really want a stranger to decide how your assets and your family business will be distributed? Changing Roles: Sole proprietors are used to working independently. Having to share decision making, especially with one of your children is a real challenge for most sole proprietors. Once two people have to work together, the working relationship has changed. Partners are team members who have to talk, share decision making, and who have to learn how to fight without hurting each other. Family relationships add more complexity to the new "team" relationship. As a parent, you have to learn to see your child as an adult and then relate to the adult person you are now working with. Human Dynamics: Human dynamics and variations in our behaviour add more challenges to the difficulties of working together effectively. People vary - some are natural born leaders and communicators, others make great team members but are less inclined to take the risks associated with leadership, while others just want to work alone. Learn to step back and assess your behaviour when human dynamics become a problem. Think before you act. Be diplomatic. Work it out tactfully. Hopefully you find this out during the time when you are testing your working relationship. Testing Period: It is wise to set up a short testing period with your child who may become your business partner. A testing period of two full years where your child works for a wage and receives a profit share helps to test your working relationship and testing your successor of accepting further responsibilities. Can the successor be accountable for the business or can they work together, if more than one successor is in place. If it does not work up to expectation, then the owner will have to take further drastic steps. Using a testing period leaves doors open for remedial action, if necessary. If the working relationship doesn’t work out and you have left an escape route, you have protected the family relationship. The alternative usually means one less family to come over to your place on festive day. Communication: Communication skills are of critical importance for the successful transfer of a viable operation. Jack Schultz’s business is still growing as he still has a backlog of about five days’ work. Larger businesses require teamwork and coordination. People can’t read minds, so they have to learn how to work together effectively. Regular business meetings where communication is open and decisions are made by consensus (as much as is practical) keep conflict to a minimum. Jack has to see conflicts, if any as a positive issue towards successful succession of the business. Words: Watch what you say and how you say it. If you are going to work as part of a team, don’t hurt your team members with harsh words. Provide constructive criticism, not abuse. Train successors: How can a child take over a hia business if they don’t get any training? You would not want your son or daughter to say: "Dad taught me how to work but he never taught me how to run a business". As a parent, you are the mentor, and your child is the young entrepreneur and potentially your future business partner. Young entrepreneurs need to learn how to make good decisions and how to seek out advice they can trust. They need skills in strategic decision making, planning, communications, capital investment decisions, credit management, cost control, marketing, employee relations, and then they need to have the production skills that fit their business. These days the business skills need to be better than the production skills. Other options : They should work for someone else to experience what being an employee feels like. They should learn that other people make mistakes, but they learn from them. They will discover that Mom and Dad have their own biases and fears. Let them experiment with another enterprise (with a fixed budget) and they will experience stress, success, failure, rationing limited capital, and critical decision making. Train yourself for retirement: The "retiree" has to find a balance between being available to help and being critical to the operation. If you want freedom, you cannot afford to be critical to the day to day goings on of the operation. Here are some other points to keep in mind: stay active, and take care of your hearing and sight; explore other interests or enterprises; take up dating again (with your spouse); stay technically up to date with the changes in your industry; and try to maintain a positive attitude - tell your child what they do right. Keep yourself physically healthy and mentally sharp - you will live longer and be a much happier person to live with. Business Agreements: Once you’re sure that you want to work together, the working relationship should be formalized by a business agreement. The issues addressed by the business agreement are as follows: Who is involved? Who owns what assets at what values. How decisions are made - monthly meetings, by consensus of all partners Banking and income distribution Areas of responsibility Access to information (like records and financial statements) Use of business assets as security for personal liabilities (should not be allowed) Conflict resolution - mediation, arbitration Getting out - buy-sell agreements and contingency planning Professional Advisors: Most business transfers will involve the following professionals - an accountant, a lawyer, a banker, a financial planner, and your management advisor. Professional advice can be costly, but with family business being worth several hundreds of thousands of dollars these days, you want your business transfer to be handled properly, with a minimum amount of tax. Don’t be afraid to modify your plan in the middle of the transfer process, or to change your mind about the type of business structure you choose. It’s your business and your situation. ;;;;;;;;;; Jack to work as a partner with his successor. The basis is to run parallel before handing over fully and permanently. ;;;;;;;;;;; Identify and briefly describe four characteristics you would expect to find in a successful manager of this type of venture. The characteristics required for this business may be briefly described as follows: 1. Knowledge of the business. The person going to manage and run this business will need to acquire the knowledge of the business. The trick and trade of the operations is necessary in order to achieve the bottom line. Without the proper knowledge, the key man will not be able to contribute effectively towards his business which is to be his own thereafter. Knowledge here covers everything including procurement, operations, marketing, finance, tax and handling of various authorities. 2. Leadership capabilities. The person need to exhibit high leadership qualities as this is not a big company where he can depend on a full professional management team for suggestion, checking and follow up. He needs to be aggressive, high in creativity and strong drive to face the challenges ahead. In this particular business, the person to lead must be a strong leader to manage the other two family members. 3. Ability to plan. This person must be able to plan and organise the operations, functions, budget and human resources. Business plan is always a sensitive matter at all times in order to stay in business and also a set for future expansion. The manager should be able to execute the business plan within the limited resources available. He should be sensitive not to effect the bottom line negatively. The manager should have the personality of a starter and a finisher. Things that he planned and take-off should be completed successfully, with proper review along the process. 4. Enthusiasm about the business. The person should have high enthusiasm on the enterprise he is to take charge. He should have the confidence to succeed in order to start and take responsibility of the enterprise, to keep the firm going.