Business Succession Planning
Who is going to run your company or care for your investments if you die or become incapacitated? Have you planned ahead?
Many years ago, our attorney advised us to implement a succession plan. His concerns centered on who would manage the company in case I was unable to. As a business owner and an owner of investment real estate, I was not prioritizing the significance and urgency to set up the succession plan. I ignored his advice. I kept putting it off for later.
Then, I started traveling internationally, and in July of 2014, a Malaysia airplane was shot down over eastern Ukraine. As a regular traveler to India, I tracked the flight plan of the daily flight, and much to my surprise, our flights from Seattle went over the North Pole, over Russia and Ukraine towards Doha or Dubai, and then on to India. The flights we were taking were over dangerous territory, and in case we were knocked down by a SAM missile, I decided that now was the time to plan for my leadership succession. This is still an issue even for the airlines that are allowed to fly over Russia, unless you are one of the 36 countries whose flights are currently being blocked from overflights.
What is succession planning all about?
As a leader, you always need to have a backup plan. It’s your responsibility to create a road map for your family or senior management to follow. Ambiguity is a dangerous place. Without clear instructions, it’s not clear who should fill your spot. The lack of a plan can create confusion, resulting in personnel conflicts, a dysfunctional company, needless uncertainty for middle managers and staff, detriment to credit/lender relationships, and difficulty with customer retention.
Once you have drafted such a plan with your attorney, significant other, and management team, you will want to share it with the key people in your organization who would have to implement your plan.
Remember that the financial strength of the company is at risk if the decision-making leader is incapacitated. You will want to put in place a key person and short-term/long-term disability insurance as part of your planning process to smooth out the bumpy financial ride that could occur when a key person is unable to work.
To give you a simple guide in drafting such a plan, I have modified and inserted the key language from a corporate plan below. A plan like this needs to be in writing (paper or electronic), delivered to your CPA and attorney, and kept current. All the key people around you need to have a copy of this plan and to review it annually.
Succession Plan Sample
For purposes of this Plan, the President or Owner’s death, permanent disability, or temporary disability will be referred to as the “Event”, and the terms “permanent disability” and “temporary disability” are defined in the Corporation’s bylaws (the “Bylaws”).
The procedures to be implemented under this Plan include taking these steps, in the following order, after the Event occurs:
Acting President/Owner (Owner) After Event. The acting President/Owner/ Owner has temporary authority and is designated in a shareholder resolution, which may be amended from time to time. Until amended, the shareholder resolution dated the same day as this Plan governs. The Acting President/ Owner/Owner shall have all of the authority of the President/Owner until the next special meeting of the Board/Key family members of Directors after an Event.
Note: If there are no Board/Key family members or directors, then the Owner can preset the new leader of the company. This leadership mantel can be changed every year if you like to meet the changing needs of your company.
As soon as possible but no later than one week after death or incapacitation.
By the end of the first week after the Event, the Acting President/Owner/ Owner and the Board/Key family members of Directors shall hold a special meeting of the Board/Key family members, if possible, to address the following matters.
Notify each bank in which the Corporation has an account to establish or confirm and modify, if necessary, the signing authority of the Corporation’s officers for the accounts;
At the special meeting the Board/Key family members shall appoint a successor President/Owner for a term, which the Shareholders desire to be the same individual appointed as the acting President/Owner.
Communication:
TIP: How this is handled will drive the future success of the company (your investments). You need to make sure there is no ambiguity. The messaging must show a well-oiled handoff from one leader to another, to demonstrate that a clear succession leadership path has been adopted.
Develop and begin to execute a communication plan, which should include, to the extent appropriate communications with:
Employees of the Corporation/ Family members.
The advisors (CPA, Banker, Attorney); and
Key clients, referral sources, and other stakeholders.
Appoint a key (Chief) Operating Officer to manage the day-to-day operations of the Corporation, which the Shareholders desire to be the individual identified in the Shareholder resolution.
Consider whether to begin a search for a long-term President/Owner.
Event Impacts. The President/Owner and Chief Operating Officer shall work together with the management team and with the Board/ Key family members to address the impacts of the Event on the Corporation, including by addressing and reviewing the following:
The status of all properties managed by the Owner/Corporation
Financial statements, including a current balance sheet and profit and loss statement (which may be pro forma if statements current within thirty days are not available).
Cash flow, working-capital needs, financial resources, and other financial matters.
Borrowing and other credit needs.
Insurance policies and bonding, and confirmation of adequate coverage.
Retaining clients and customers, securing new business.
Staffing and other personnel needs.
Monitoring receivables and payables.
Preserving other business relationships and contacts.
Any new day-to-day management or service issues that may be appearing.
Remember, Don’t Wait
We typically have an aversion to planning for death or incapacity, but unfortunately, life is unpredictable. Planning ahead will prove to be an invaluable demonstration of leadership and kindness toward those who have to carry on.
To help smooth out the bumpy ride, I would encourage you buy disability and key man insurance and to implement a succession plan before any event occurs. Unfortunately, these events do happen, and one such event prompted the drafting of this article.
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909 , Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
