Grooming heirs is a continuous process

Financial advisers who own a firm or have clients who are business owners appreciate the need for sound succession planning.

Having a plan in place ensures stability well into the future, which means that clients are more likely to be around for multiple generations.

The trick is that a good succession plan is like a battle plan: It's perfect only until it goes into action, and then it's likely to fall apart in five minutes.

Plans therefore should be built for flexibility and be under constant review.

Of course, being vigilant about the quality of the successor is a significant challenge. That means planning should be a continuous process that unfolds over a number of years, not an event to be tackled only at year-end or when change is imminent.

Managers should continuously work to identify multiple candidates to groom and create an environment through which they can instill the company's culture, values and customer outlook so that their ideals will carry forward when new leadership steps in.

ON THE SAME PAGE

The most important element of a smooth succession is ensuring that everyone is on the same page, whether or not it is time for the plan to be enacted.

Here are a few approaches that advisers should take when planning for transition:

Enact the 360 review. Personnel reviews are often linear, with direct reports being evaluated by their superiors. A 360 review expands the process, inviting evaluation from superiors, subordinates and peers. The full view of a key employee then feeds into a succession plan, as it allows people in line for executive roles to provide their input on management and the direction of the company.

A number of key pieces of information come out of this process, including:

• Who are the succession candidates?

• Do they know that they may be tapped for leadership?

• Do candidates have ideas about changes that they feel are necessary to improve the business?

Limit risk. Family and privately owned businesses alike have a unique set of succession challenges that go far beyond simply choosing the next chief executive. Great consideration must be given to who is included in the business and what roles they play. Forcing the wrong family members into management, for instance, can destroy relationships and the business. One way to limit risk is to create a holding company with a diverse portfolio of subsidiaries, which creates more opportunity to spread out family talent by matching positions with capabilities and personalities. When there are fewer square pegs in round holes, continued growth for subsequent generations is more likely.

Give up the reins. Senior generations often have difficulty yielding control when their tenure comes to a close. Even when they are fully supportive of their heirs' stepping into management, they hesitate to back away from their life's work. Diversification through subsidiaries allows elders to move from an operating company into legitimate, meaningful positions elsewhere in the holding company or another portfolio company, creating a pathway for the younger generation to take charge.

A holding-company structure allows leaders to migrate from a family-managed company to a family-owned and professionally managed company. Bringing in a layer of separation means that the senior team can slowly separate themselves from day-to-day operations without forcing control onto a generation that isn't yet equipped to lead.

Consider estate-planning strategies. There are also standard estate-planning benefits that come into play with family businesses. Succession planning in these cases can incorporate gifting strategies to ensure that value is being moved to the next generation in preparation for their coming on board.

Advisers will agree that December isn't the best time for reviews of personnel and the succession plan. Client needs for tax and estate planning dominate the days leading up to the New Year.

SMOKE CLEARS

However, in January, the smoke clears. Next year, there may be an additional lull due to the expected budget deadlock, providing more time to evaluate long-term plans.

Regardless of when a succession plan is drafted or reviewed, advisers shouldn't sit idle on succession.

They should view it as an continuing process — part of the DNA of business — whether for their own firm or a client's business.

Frederic J. Marx is a partner at Hemenway & Barnes.