Succession Strategies: The Keys to Effective Short- and Long-Term Transition Planning for Your Company
04 / 02 / 20

Succession Strategies: The Keys to Effective Short- and Long-Term Transition Planning for Your Company

In this episode of The 3 Wins Podcast, the executive team at Legacy Advisory Partners takes a deep dive into succession strategies for businesses.

That’s because, depending on the studies you look at, anywhere from 60% to 75% of privately-held businesses don’t have a succession plan in place in the event that the owner passes away, becomes disabled, or otherwise is unable to run the company.

So, why do so few business owners have a formal succession plan?

What are the most important points to consider when developing your short- and long-term transition plans?

And how does the lack of succession planning impact key leader retention?

We dive into these questions and more…

Below, you can either watch the episode, listen to it, or read the lightly edited transcript from our conversation.

YouTube | SoundCloud

You can also download our FREE whitepaper, “The 3 Wins: How to Unleash the Collaboration Effect on Profits in Your Company,” here.


Episode 1 Transcript:

00:00 Sean Lyden (Host, CEO, Lyden Communications): Today I'm with the executive team at Legacy Advisory Partners, and we're gonna be talking about succession strategies for businesses. And that's because depending on the studies that you look at, anywhere from 60 to 75% of privately held companies don't have a succession plan in place in the event that the owner passes away, becomes disabled or otherwise is unable to run the company.

So we kick off today's conversation with this question: Why do so few business owners have a succession plan in place?

Barriers to Succession Planning

00:37 Russ Clemmer (President, Legacy Advisory Partners): From an entrepreneurial standpoint, they don't know these—the questions around what to do next. Because they've been for so long in the phase of, "We're building the business and actually getting it to a point where it's profitable, we've kinda made it through that phase, and now it's been profitable for a while." They're just graduating into that question of, "What do I do with this thing?" or, "What if something happened to me, I don't have to worry about... Well, it's not profitable anyway, now that it's profitable I gotta worry about what happens to me, and how do I deal with some of these things." So some of it is just a natural progression versus sometimes it is actually a distraction, that's keeping them from doing these things, so.

01:20 Sean: Yeah, and I would imagine as well as an entrepreneur you're wired to be an optimist, where you see yourself as, "Why would I think about the negative? Why would I think about me not running the business?" So I got to imagine that you've got a run counter to the way you tend to be wired when you're an entrepreneur, is that something you would see?

01:47 David Harper (CEO, Legacy Advisory Partners): Yeah, I think it's, you really have to turn that around. It's really... The most optimistic thing would be that you create a business that can run without you. And you've created something that's... You've created what maybe initially is, maybe a high-paying job, but you've turned it into more of a passive investment where then... Then there's no boundaries on what the business can be if it's not limited to what you can do directly.

02:18 Sean: Okay, so... Okay go ahead.

02:21 Russ: The resistance often is sometimes it is a, it's an ego thing.

02:27 Russ: And, we've had different folks refer to themselves as the wizard or they're comfortable being the most important person.

02:36 Sean: Right.

02:37 Russ: Even though they probably don't understand the depreciation that is forced upon the value of their company because they insist on being at the center of the circle. Sometimes it is a challenge to say, alright, whether you like it or not, if this other alternative is what you wanna realize, and this is the steps we're gonna have to take with you as the owner being in the center of the circle, moving them out so that we can help them look at a plan holistically and put something in place that they really want to achieve from a legacy perspective.

The Bottleneck: Getting Out of the “Center of the Circle”

03:13 Sean: Now, you talk about the “center of the circle,” if you can kinda define what you mean by that.

03:20 Russ: Yeah, so... You can all jump in.

03:21 Marc Walker (Chief Investment Officer, Legacy Advisory Partners): I was gonna add...

03:22 Russ: Go ahead, Marc.

03:23 Marc: Sorry, I was just gonna add one comment. It is a shift in mindset that you were talking about, because for all these years, they've run the business from our entrepreneurial perspective, but really for them to get the most value out of the business they need to be less dependent in the business. So we always say for an owner, the more assets they can set aside to be financially independent then the more flexibility they have at time of transition in really trying to carry on the legacy they worked so hard to create.

04:00 Sean: And Marc, I think that ties into... Russ, that question I was asking you was that center of the circle, 'cause what Marc was talking about there is the aspect of it being dependent upon you—I guess, being the center of the business for it to operate properly—is that what you were meaning Russ, in that regard when you say center of the circle?

04:21 Russ: They can always use as the example of Tommy Lee Jones, in the movie, The Fugitive.

04:26 Sean: Okay.

04:26 Russ: Harrison Ford, the plane has crashed, Harrison Ford is on the lam, and all of a sudden you see Tommy Lee Jones with all of the US Marshal lieutenants around him, he's standing in the middle of the circle and he needs to give everybody orders. Nobody can do anything without him being there to tell them what to do. And so that's kind of the image that we share with folks of you wanna get to a point where them, the leaders as a team, are able to, they may not fulfill the entire visionary role, but they're gonna be able to come in and say, "Hey, what are the best practices and what are the best steps forward working as a team?" versus one single person being in the middle of that circle and everybody waiting until the owner has approved of the things that they're trying to do. So it takes away initiative, it takes away those different things. Where you see, which is what we try to get to, this collaboration effect. So if something is at the middle of the circle, the profits are only ever gonna grow as high as that person can stay at the middle of that circle. Without the person there and assuming through the team coming together and collaborating at a high level. You're talking about the collaboration effect on profits. That's where we ultimately like to see our clients get to.

Succession vs. Transition Planning: The Same Thing?

05:53 Sean: Okay. Now, let's go into defining the terms that we're talking about here, 'cause we kicked off this conversation talking about succession planning, we've also used the term transition planning. Just to be clear, those mean the same thing, is that correct? Succession and transition planning?

06:15 Russ: They can.

06:15 Sean: Okay.

06:15 Russ: In a larger company, when you talk about succession planning, you're talking about multi-tiered organizational charts.

06:24 Sean: Okay.

06:25 Russ: Where there's a succession plan for every role within the company. So, that you can go from a talent development standpoint into a risk perspective you're able to give people a path up that 'corporate ladder', graduating to higher levels of responsibility and a plan for pushing those people through that system. So it's a great thing to have in place, very necessary, otherwise talented people say, "I don't see a path forward. I don't know where I'm headed from here." Until somebody just makes the decision and says, "Hey, why don't you try this?" So it's good to have a succession plan from a risk perspective, if for some reason the higher you go the more important those people are to the overall functioning of the system. If one of those people from a risk perspective, something happens where they leave the company or involuntarily they're separated from the company...

07:16 Sean: Sure.

07:17 Russ: Then you have a big void and you have to have people with that succession plan in place—you have people who have graduated and are ready to step into that next role.

07:25 Sean: Okay.

07:25 Russ: So it's a continuity succession conversation, where when we define transitioning, what we're talking about is both people through the organization, but primarily the owner, transitioning the owner out and transitioning the non-owners into an owner... Either an owner-mindedness from a leadership perspective then alternatively a true equity owner taking over that ownership role so that the owner, current owner can realize the equity that they have in their company.

08:03 Sean: Yeah, go ahead, David.

Involving Your Team in the Transition Planning Process

08:04 David: Sean, that also applies if you just sell to a third party. We think that the important thing is for the entrepreneur to get out of the middle of the circle, empower a team that can run the company without him. And that even if you just sell to a third party, you can align the leadership team with an event by some type of a participation plan, long-term incentive plan, option plan, stock appreciation rights, different plans like that. But we think it's important to get the word out to your leadership team, "Any business has to prepare for an ultimate transition. And for us to do that well, I wanna involve you in the process and I want you to be aligned with my interest as the current owner." Assuming that person owned all the shares.

08:56 Sean: And that's you speaking as the owner to the leadership team.

09:00 David: That's right.

Definitions: Short-Term & Long-Term Transition Plans

09:01 Sean: Okay, now you mentioned long-term transition plan and in previous conversations we talked about both short-term and long-term transition plans. If you all could define what a short-term transition plan is, what that looks like and then go into what the long-term transition plan looks like.

09:30 David: Yeah, Marc, you wanna get in on that one?

Short-Term Transition

09:33 Marc: Sure. Yeah, I'll take a stab at the short-term piece. The short-term transition, one of the key elements is as a business owner making sure that if something were to happen to them, that they have some defensive measures in place. One would be if they become sick or injured and couldn't work, become disabled, that they have adequate disability coverage that could pay them their necessary income stream. Also you can set it up where you can try to realize some of the business value that's there, because if you're not able to work the business may never... May be able to operate without you. So that's a real key piece to secure that. And then also looking at your life insurance coverage from a personal perspective, making sure your family is taken care of but also factoring in what the business worth is.

10:36 Marc: If something happens to you, you wanna make sure there's money there as a key man element, that comes back to the corporation that gives them some capital to fund projects and the business to continue. And then additional life insurance proceeds there that can help redeem the stock. Maybe, hopefully, you have a leadership team that can take over and that could be a part of the sales process to minimize the number that it gets the family the money they should receive from the business. And it gives the business ownership shares to other people in the organization and that's kind of making sure all those elements are in play are really key to the short-term transition of the organization.

11:32 Sean: And a quick follow-up on that, you mentioned key person insurance. Define what that is and what that tends to cover.

11:43 Marc: Sure. So key person [insurance] is gonna look at—if you were to have to—the person, the owner, dies. Money is gonna come in to—the corporation's gonna be the owner and beneficiary of the policy, that the life insurance proceeds comes back to the corporation. They can use it to, if they have to hire somebody like an interim CEO to run the organization or it gives the company some capital to—if times are tough without that leadership, they've got some capital there to help fund the organization. But that's how that piece of it would work.

12:13 Sean: Okay. Anything else on the short-term transition plan that I should be keeping in mind?

12:35 David: I think that, well, one part, and Russ you might wanna speak to the second part of this, but one is, it's really important to zero in on the ownership. Who owns the shares now, who would own them in the event of a death or disability? And then the other part that Russ likes to focus on with our clients, is transferring the responsibility that you currently have. Who's gonna fulfill that role, what you've been doing? And Russ, you might talk about how, what's the process for doing that?

13:07 Russ: Yeah, that's good. Yeah the emphasis is on getting the owners to acknowledge that they are owner-operators versus simply just owners.

13:20 Sean: Okay.

13:21 Russ: So when you're kinda talking through with owners about this idea, they are a little bit hesitant, they still wanna say... Well, I'll always be here running the business, that's not gonna happen, which they know it is, but they're just getting used to the idea.

13:39 Sean: Sure.

Taking Stock of Your Company’s Dependence...on You

13:39 Russ: But what we try to get them to focus on is, "Hey, in the event of your death or disability tomorrow," we just kinda... We don't... It could be any time but just say it happened tomorrow, describe for us what you do, that only you do that helps the company be successful. And so with that little question they start to think through, "Alright, well, here's some of the broad strokes and then we say, "Well that's good but we need this to be an exhaustive list because we need to know what makes this company successful, that you personally are in charge of. And so there's a continuum of answer. So to the degree that they assume that they are the wizard and everything happens according to their approval and recognize fully what everybody else does on the team or in the district.

14:36 Sean: Sure.

14:36 Russ: You'll get an answer of, well, I kinda do everything, I touch on everything.

14:41 Sean: Right.

14:41 Russ: There's not really a lot that happens in the company without me, but then you've got some folks who were like, "Well, actually, I've taken some time and I have delegated this area and this area and this area. "And to the degree that they have actually delegated it versus they've delegated and every now again, they come down and micromanage for an hour, and then leave again, right?

15:07 Sean: Sure.

15:07 Russ: At least there's a continuum of perspectives on acknowledging that they have responsibility in the firm, and that eventually someone will have to take that responsibility over and to the degree that they can successfully do that, then we can start having the conversation of, What would it be like just to own the company. What if you didn't have to do anything except receive distribution checks from the company, what would that be like? And so getting them to that point where we can kinda bridge that gap, creating that exhaustive list, building a timeline for who needs to take over what responsibilities, over that timeline and then... And while we assess the team, the leadership team, we're saying, "Alright listen, there is no one here that can do that." You gotta plug that hole. You might not have to plug it today, but if something happened, then the company needs to be able to have the resources to go find someone who can fill that role or there need to be other alternative plans, where a third party could come in, and fill that from a consulting standpoint, or just work through those scenarios. And that's one of the biggest... That's probably the biggest psychological shift that we have to help guide our clients through.

Making the Psychological Shift from Operator to Owner

16:30 Sean: How do you help guide them through that? 'Cause I gotta imagine just internally, psychologically, they may push back on that because they find so much value in what they bring to the business. That was their baby, it wouldn't have started without them. So how do you help them make that shift in their head?

16:55 Russ: The first step is theirs, if they're not willing to acknowledge that, then they're probably not a great client for us.

17:01 Sean: Sure.

17:02 Russ: Ultimately what we'll do is we'll help 'em put a couple things together, but the value that we could bring the table will not be realized because they wanna hold everything too close to the vest. And those are really the sad cases because they don't fully get a chance to envision their legacy, the way it could be and it's just one of those where they're suffering from one of the vices we talk about of greed or distraction, or just one of those things where they are, they're just, they're holding not too tight. So if they willing to acknowledge,"Yes, I understand, I get it. Less of me is actually makes the company more valuable," Not that they're not gonna have a role for a long period of time if they want to.

17:54 Sean: Right.

17:54 Russ: But that at least we could create a plan around the role. Then if they're willing to acknowledge that, then that's probably over half the battle.

18:02 Sean: Okay.

18:03 David: Yeah, another way to think about this, Sean, too, is most people, they do a lot of things and they're really only a few things that they really enjoy the most. And so the positive thing is saying, "Think of some things that you don't really enjoy doing, and let's just say, move those off your plate, delegate those things away, and only focus on your sweet spot. What are gifted at? What do you love doing? What can you do all day without getting tired? That's what you want to focus them on, so that's really a... I should free them up. And then over time, as you delegate more and more away, the final remaining thing that the owner can still bring to the table since they're the founder is asking the question, "What's next for us?"

18:57 David: And that's the ultimate creativity right there that you bring back to your team to say, "Hey, I have been thinking about this, what do you guys think".

19:06 Sean: Yeah, it sounds like they're building that delegation muscle.

19:10 David: Yeah.

19:11 Sean: And as they're building it, and they're freeing themselves up, they start to see the possibilities.

19:19 David: Right.

19:19 Sean: "Oh wow, with this freed time, I can think more strategically about the business".

19:25 David: Mm-hmm.

19:25 Sean: And that can kind of becomes the juice for them, something they can enjoy as long as they own it, but then it allows them to envision what it would be like if they looked at what's next.

19:38 David: Yeah.

What Defines “Short” Term?

19:40 Sean: So we talked about short-term transition plan, how many years does that cover? When you say short-term versus when you're going to look at the long-term transition plan, what is that kind of cut off time or threshold?

20:02 Russ: There's a line of demarcation.

20:04 Sean: Okay.

20:05 Russ: And it's different for every single company.

20:07 Sean: Alright.

20:08 Russ: And what happens is, is you get to a point where the short-term transition if you don't have certain planning steps in place already.

20:16 Sean: Mm-hmm.

20:18 Russ: If the company is inherently valuable, whether... No matter who... You know if it's a certain type of technology or it's got a certain patent or whatever it is, then that's a different story. But most companies, if it's entrepreneur led, there's a lot of weight and value that goes into the owner operating and leading, a lot of the relationships are there.

20:37 Sean: Sure.

Why Short-Term Transition Planning is Critical to Business Success

20:37 Russ: So if there's no short-term plan in place that has planning components around death or disability in the short term, then at that point, you're kind of just sitting there saying, "We need to get these different things in place.” Because if something were to happen to you before we get the disability pieces in place, the buy-sell or leadership team built out the delegation strategy until we get this in place, then we've got some problems. We've got some operational issues. It's probably gonna end up being a wind down. We don't know how your family would fare after any of this would occur. So there's a lot of holes in what we call gaps in planning that we have to help them bridge. So we put those different pieces in place. Once those pieces are in place to where we can say, "If it happens tomorrow, or in two years, either way, we're okay, we know the plan, we've got the different steps in place, people know what the plan is". Once we get to that point, that's what we call that line of demarcation where anything beyond that.

21:49 Sean: Mm-hmm.

21:50 Russ: For this extra years of the owner owning the company and working in the company.

21:56 Sean: Okay.

Long-Term Transition

21:56 David: Yeah, another way to think about it, Sean, is that the shortest long-term transition plan is probably a minimum of five years.

22:05 Sean: Okay.

22:06 David: So what the short-term transition plan does, it buys you some time until you can get all the pieces in the puzzle in place, for the five-year event.

22:17 Sean: Okay. So the short term is there to go okay, "If something happens in the very near term... "

22:25 David: Yeah.

22:26 Sean: Are we gonna be okay, is the business gonna continue?

22:29 David: Right, yeah.

22:29 Sean: And then that allows you to work out "Okay what are we looking at in the next five, 10 years from now?”

22:36 David: Yeah, right.

22:36 Sean: Okay.

22:37 David: Because, typically whether it's an internal sale or an external sale, the purchaser is gonna be looking at what's the present value, future cash flow, and it's probably over a five-year period of time.

22:50 Sean: Mm-hmm.

22:52 David: Or longer. So that's why we typically, it's we're having to kind of stretch the minds of the entrepreneur to think beyond just this year and say, "Look let's run it out over the next five years and see what could it be, and dream a little bit.” Knowing that it's gonna change somewhat based on the economic environment and so forth.

The Key Components of a Short-Term Transition Plan

23:14 Sean: Now, let's look at both the short-term transition plan and long-term transition plan and starting with the short term, what are the key components that should be included in it? Now, Marc you had touched on some, but if you can kind of outline what would make an effective short-term transition plan?

23:38 Marc: Yeah, beyond the disability insurance that we talked about. The key man life insurance that the corporation is gonna be the owner and beneficiary of...

23:47 Sean: Okay.

23:48 Marc: Then maybe some buy-sell coverage. Having some formalized legal agreements is obviously a big piece to bind the actions that you want to transpire.

24:01 Sean: Uh-huh.

24:02 Marc: And then looking at when you think about we're trying to help the entrepreneur owner to look at the three wins. So, yeah, from a shareholder perspective, what are they trying to accomplish for themselves and their family. How does the corporation get a win. And then how do their key executives get a win in this process of they're helping grow the business, then they should be able to share in some of that success. So going back to the shareholder with helping them identify, What do you need to be financially independent? What's the income, your lifestyle that you're living now, that you wanna live in five to 10 years, or whatever that time frame that you've identified, of wanting to be financially independent? And then looking at what are the current assets that you've set aside and your planned contributions, and identifying, "Is there a shortfall or a gap that we've talked about, that you need to close through distributions or through the sale of the business in the long-term transition?" Those are key pieces of looking at on the short term of, "Alright, here's where we are today, here's where we wanna be, and how do we close that gap and start identifying that and putting steps to be a part of the longer-term process?"

The Impact of Transition Planning on Key Leader Retention

25:34 Sean: And you mentioned the three wins, and one of those components was the key leader retention. And, I would imagine that having a short-term transition plan in place would be a huge factor in retaining your key leaders. Is that something you guys are seeing or, kind of expound on that?

26:00 Marc: Yeah, I think when you've identified your key leaders and they're part of the organization, they wanna know that if something were to happen to you, what's gonna happen to the business? So it's not only the financial pieces, or the products that you're putting in place, the disability, the key man coverage. But, I think a key piece is the communication. This is the plan, having the key leaders get buy-in of, "Here's what we wanna accomplish, here's the win for you, and here's the win for the company. And here's the win for my family." So, everybody's kinda seeing, and think of it as kind of a spider web of different pieces, but taking a step back and see how it all fits together is very important to have a successful outcome for all parties involved.

26:55 Sean: Now, before we move on to the components of a long-term transition plan, anything else you all would add to what Marc has said?

27:07 David: I just think the two go together. If you just focused exclusively on the long-term incentive plan, then they're gonna ask the question, "Well, what happens if you don't make it till that time?" And if you just focus on the short-term they'll say, "Well, what happens if you do live?" So, the two go together and you wanna fill in all those pieces of the puzzle for the win, for the key leaders.

27:30 Sean: Okay.

27:32 Russ: And with the right... The owners that we like to work with are the ones that they're paying attention to culture, and they are looking for a Patrick Lencioni kind of person that's hungry, humble and smart. The ideal team player. So, those types of people, they're asking these questions. Well, what happened? I wonder what's in place if the owner passes away or if something happened. I wonder what would happen. 'Cause they're thinking ahead. Those type of people think ahead, they ask these types of questions. And so, typically it's an easier job, because they're interested in what this looks like.

28:18 Russ: And they're not interested from a career standpoint, they may be ambitious to the point where, yeah, I could see myself buying the company if there was an opportunity, or being able to lead at a higher level if the need arose. So, the fact that you're just asking the questions, getting Conners to ask the questions of which ones are to be prioritized first, and then putting a plan together, and back to the statistic that we opened up this conversation with, having a discussion and a plan that's written out and communicated. It may not be perfect, and there may be some time, there are things that have to happen before it's able to grow into the long-term transition plan that we want it to. Simply having one written down and communicated to the necessary parties is monumental and one of the hardest things, and that's why you see so few companies actually get it done.

Who Should Be Involved in the Transition Planning Process?

29:16 Sean: I wanna park on this for a second. So, who should be involved in these conversations with the short-term transition planning? Who's in the room to ensure that this plan covers all the bases, and will be as effective as possible?

29:39 Russ: Yeah. As the financial planning advisor playing that role, that's what Legacy does, the other people on the advisory team for the owner are the CPA, someone who knows and understands the tax strategy. Someone from a legal perspective, an attorney who can handle these different types of discussions from a business planning perspective, making sure that the intentions are reflected in the legal documents. And then, from time to time you'll have different people who weigh in from an estate perspective, if it's a little more complicated in how they want certain things to be set up, but those are the main components that we want to see around the table, so that from an advisory perspective, is a collaborative effort.

30:36 Sean: Yeah, okay.

30:37 Russ: And making sure the needs of the particular owner are customized in the result.

When to Involve the Leadership Team

30:43 David: Another part of that is we think it makes sense for, as the owner is envisioning the three wins, the shareholder win, the company win, and the key leader win, before he gets too far along on it, we think maybe somewhere in the 70%-80%, you need to start floating it, you need to involve the leadership team in that conversation to get buying-in. You don't want to have all the details worked out and impose it on them, you want to invite their thinking and strategic perspective on that. That's when you really get the buy-in.

31:24 Sean: So, that's the threshold? About a 75%-80% of the way there?

31:29 David: Yeah.

31:29 Sean: Not early on in the process where you haven't thought through what's most important to you on the shareholder side, but after you've got it pretty well formulated, but you're not close-minded, still there's some opportunity to flex.

31:32 David: Usually yeah, the leadership team will round out the perspective and make it a better plan than it would have if you'd have taken it all the way by yourself.

Getting Family Input

31:32 Russ: Probably not the final piece, but definitely a group that needs to weigh in is the family of the owner, and in different ways, if it's a young family that's a little bit different obviously, but if it's an older family, especially if the family is working in the business, there's different elements of closely held family-owned businesses that you gotta have that buy-in. You can't be ending things in this situation. For it to be a true success, you gotta give the right people the opportunity to influence and buy-in. But again, we start with the shareholder win first. That's the thing. If you are the shareholder, we wanna coach you in how to make sure that win is maximized in the right way, not just dollars, not just dollars, but the whole experience for everyone, so that it's a win all the way across the board.

The Key Components of a Long-Term Transition Plan

33:02 Sean: Okay, now we talked about the short-term transition plan being that immediate stop-gap to buy you time to develop the long-term transition plan, and Marc talked about the key components that would make for an effective short-term transition plan, what are the key components that would make for an effective long-term transition plan? What are the key things that business owners need to have in mind, the questions answered, and so forth?

33:39 Russ: Yeah. So, I think the short-term, everything we've already talked about, fits into the long-term. It's one of those where if you get to a point where, you can look back and say, "Alright we've got our short-term details in place, and as we go through this long term, if death or disability occurs, we can hit the fast-forward button." The key to the long-term is what-if. I've got three locations in the Atlanta area, but man, you know what, I really see some promise in Nashville, or Birmingham or wherever it is. I'm in two or three states along the east coast, but I really wanna move a little more midwest. An expansion goal. Or maybe I'm at 50% of the market share that I could probably capture, and I really wanna capture that other 50%. I'm not sure how to do it.

34:35 Sean: Okay.

34:35 Russ: So, you wanna get all the plans in place for the short-term questions, and those could apply assuming the businesses just booming and doing really well, and making plenty of money and all those different things, you still need those planning steps in place to ensure the company continues to thrive beyond the owner. The long-term is the what-if. What do we really wanna see here? What's the vision? Is it a courageous vision, and do I have the right people around me, and the difference is, the long-term is time. Time to be able to accumulate if I'm the shareholder, accumulate. Time to be able to scope out a vision to say, "Hey what could we accomplish here? And, developing the people around you to fulfill that vision, and identifying the gaps in your team, and going and recruiting and bringing those people in, to help make that thing possible. So, that's really the difference in time and having the opportunity to create it.

35:40 David: Sean, this might be a good time to talk about tools in the tool box, for the long-term transition plan. One would be the five-year model, or five to seven-year model, projecting going forward. And then in that, we have an EBITA budget of how the money would be allocated, we can determine some level of distributions.

36:07 Sean: Just real quick, when you say EBITA budget, if you could define...

36:11 David: That's earnings before income tax. Interest, taxes, depreciation, amortization. EBITA budget, or, just a pre-tax income, is what your trying to get to.

36:27 Russ: Profitability before we pay Uncle Sam.

36:30 Sean: Got it. Okay.

36:32 David: So we're trying to say, What can the distributions look like, and then how would that impact the valuation of the company? And so, once you have that five-year model, then the five-year model is what is the basis for defining the three wins, because what you'll do is you'll say, from the win for the shareholders, the financial independent snapshot that takes into account current investments in place, and Matt can maybe talk about what the snapshot looks like, but getting that built out is a big part of it. And then, the other thing then is, okay, then what's the win for the shareholders developing the long-term incentive plan? And then ultimately you're thinking, Well what's the most likely option as far as transition of ownership? Is it gonna be an inside sales to management, is it gonna be gifting to children, or a combination of gifting and selling, or is it gonna be a sell to a third party, or is it gonna be an ESOP? So, those are the options you start thinking about. The fundamentals of the collaboration effect on profit, really applies whatever the transition option ends up being.

37:51 Sean: And Matt, do you wanna dive into that snapshot? Kind of give me an idea of what that is, and what's covered in that.

38:01 Matt Joines (Certified Financial Planner, Legacy Advisory Partners): Yeah, so the business owner—they're a person, too. They've got a family generally, they have income that's coming in outside of the business, and so it's almost the same process, just with a little bit different mindset as far as putting together the snapshot. So, just like you would look at the EBITA budget for the business, you wanna look at the budgeting for the household or the family, or just the individual. So, taking a look at the same conceptual things, what assets do you have that will help bridge the gap in a short term or long-term type situation. If you're the primary breadwinner and you get disabled or you die, and that income stops then what happens? How does the family kind of persevere?

38:54 Matt: So the same concepts—and that's why it's such a great tool being able to look at these two things and you can make a lot of comparisons of... A lot of times the business owner will just think of the business. That's their baby, that's what they've poured their heart and soul in for years. Well, we need to take these same best practices and concepts, and kinda get our house in order, as well. So really just making sure that we are collecting all the data considering all the sources and everything that we have create a picture of where we are, draw out what our goals and our long-term looks like and very similar process of just making sure we get from point A to point B, and we consider all the different bumps on the road that could be there as well.

When to Start Thinking About Transition

39:53 Sean: Now, I'm curious, is there a certain point in the company's life, maybe it's a revenue number or a number of employees where the owners should put both the short and long-term transition plans in place? Is there sort of that threshold, or is this something they should be thinking about from the beginning? Share with me your thoughts on that...

40:20 David: I think they should be thinking about it from the very beginning. But of course, any business, I think has to get beyond the survival stage...

40:29 Sean: Okay...

40:30 David: If you're just scrambling to make payroll, and you're not really sure if you really have a business, that it's gonna continue. I think you have to get beyond the survival stage and then if you're in the early stage of the thriving stage, that's when you need to say, "Okay we gotta get this thing locked down both from a short-term or long-term planning."

40:49 Russ: Yeah, if you're not sure you have something to pass on or to continue.

40:55 Sean: Yeah.

40:56 Russ: That's a little bit of a struggle. And there still can be some application there. But just like if any person they're saying, "What would happen if I couldn't do this job?" The similarity is if you got a startup business, and it still hasn't really reached that threshold of being a going concern, you've still got a job. You're paying yourself to do, to work in that business, hopefully you're paying yourself to work in that business...

41:24 Sean: Sure.

41:24 Russ: And so you still need those fundamental financial planning questions around life insurance and disability. The only change is, is the business at a point where it can help me accumulate larger sums of cash than a typical salary would to impact my financial growth goals. When it can, that's when you start to look at and say, "Wow, there's something here. There's inherent value in the business that someone would be interested in purchasing from me as an asset. How do I shore that up, how do I plan for... It's maximizing the success with the business, and ultimately do something with it that creates a legacy for me and my family and it's able to help me achieve the things that I wanna achieve?" That's when you start to feel a little bit different in regards to the extent of the short-term planning you need to do.

Challenges with Transition Planning

42:23 Sean: Okay, now let's talk about challenges involved with transition planning. I don't know what you guys see in business sometimes you'll see, say in college football or whatnot, where there'll be a coach-in-waiting, this assistant head coach, who's supposed to be the one taking over. And oftentimes that can lead to conflict and a whole sort of challenges involved, even though there was this clear succession plan.

42:56 Russ: Yeah.

42:56 Sean: So, do you see that dynamic operating in businesses and what are some of the other challenges that you see when you're trying to implement a transition plan?

43:10 David: Well one of the key elements of a long-term transition plan is what Russ referred to earlier, the Collaboration Effect on Profits.

43:16 Sean: Okay...

43:16 David: So whether... If it's a football team, the collaboration effect on winning.

43:20 Sean: Okay.

43:22 David: And so there's two parts of that. One, there's the people part, and that's the culture part, the dynamic that we talk about the eight virtues that really end up improving the courageous vision, the engagement of the employees and their communication to create this collaboration effect on profits. And then there's the financial part where you're spelling out the goals, the targets. If you don't have the targets spelled out and we haven't really taken to consideration the three wins then you really don't have a game plan. It takes both to really have a long-term transition, the people part, which is the organizational development part and then the financial part where you're gonna have these specific targets that you've set, that you update and we track our progress to accomplishing those things.

44:18 Sean: So the breakdown would tend to be if you don't have one aspect involved that you don't have that synergy between culture and the business results?

44:29 David: Yeah, that's the magic...

44:30 Russ: The alternative is where if an owner sits there and he's ensuring... He or she that they're ensuring their win, they may be winning at the cost of the business and certainly at the cost of the other key leaders in the business. So it's just a mindset of... Can I win? Yeah, you can win if you can figure out how to lead, a profitable business that's fine. You're winning financially. But we're talking about a major win in this situation, we're talking about the idea of hanging it forward, passing it on to other people so they can continue to lead and you're thinking about all the other people that the business impacts. And if the business weren't there for some reason, What kind of hole... In people's lives? That's an important question that we wanna make sure our clients are paying attention to because if they're saying, "Hey can you help me rearrange all these things? I don't wanna tell anybody in the business that I'm trying to do these things. I don't want anybody else to know, it's all about me and I'm fearful that if they know they'll want something."

45:39 Russ: That's the opposite of what we want to deal with, because those situations never turn out the way that they ultimately could if they were able to open up and embrace the collaborative need.

45:52 Sean: Okay.

45:52 Russ: What we're trying to...

45:56 Marc: I think... We like to describe it as a continuum of...

46:01 Sean: Okay.

46:02 Marc: It's not a set-it-and-forget-it.

46:05 Sean: Got it.

46:07 Marc: A lot of the pieces on the short-term, are kinda set, those things lock into motion. They are there. It's protected for going forward into the long-term transition, but it's something that you're gonna continue to visit and update. So when there are bumps in the road, the key is to have that courageous vision and open communication with your leaders within your company that you can work through issues, and you're continuing to update your leaders. "How are we progressing towards the benchmarks and the goals that we set forth?"

46:50 Sean: Yeah.

46:51 Marc: I think the more that you communicate along the way, you decrease the likelihood of things going astray and venturing off the path, and just keeping the lines of communication open.

47:07 David: Sean, one thing to keep in my mind. Most of our focus here on the short-term and long-term transition plan is dealing with probably help companies that are maybe the smaller end of the scale. But we think the three wins, Russ mentioned earlier, succession planning, really applies to large companies too. We work with companies on the institutional side of our practice, they may have 15-20,000 employees. So different set of problems but still, you have to... Any kind of executive benefit or retirement benefit that you're trying to say, "We wanna improve the engagement and retention of our employees." You have to still ask the same three questions, because ultimately the company exists for the benefit of customers.

48:00 David: So we can't just think about just a shareholder, we gotta think about the shareholder, we had to think about the company, and we had to think about the leadership in the company includes really all the employees. What are the wins? If we are burning through a lot of people, or overworking our people. They're not using their giftedness, and it's just grinding through people to get to our bottom line number, that's not sustainable. And you're not gonna really ultimately have a great company. And that's a big problem in some of the larger companies and ultimately is the downfall of some what once were real large profitable companies. They don't consider the sustainability of the three wins for the benefit of their customers, that leads to their demise. So we like to always at least think about whether it's a benefit question, about for the executive deferred compensation plan, or the design of their 401k plan, or stuff to do other types of executive benefits, or group life insurance or group disability. What are the three wins? How's this gonna benefit the customer? How is this gonna benefit the shareholder, the company, and then ultimately the employees?

49:19 Matt: Yeah, and having the balance between having the short-term addressed as far as your quarterly or annual goals. Being able to accomplish those without forgetting about the long-term vision, or success that really drives you to the level that you wanna be. It feels like nowadays the bigger the company gets, the less that they are worried about that long-term sustainability, they're more focused on the quarterly numbers, the quarterly income reports that come out and they're willing to mortgage the future basically to hit the numbers in the short term. So you gotta have a balance between the two, and understand that sometimes you'll lose in the near-term because you're investing to long-term success.

Legacy’s Journey with Transition Planning

50:21 Sean: Now before we close out our conversation today, I'm curious. Legacy Advisory partners is a privately held company, and I imagine you all have had to work through your transition planning, just as you talk with clients. Kind of walk me through what you guys have wrestled with in terms of your story.

50:49 David: It's a great question, the saying we like to say among ourselves is we have to drink our own Kool-Aid.

50:55 David: You gotta practice what you preach. [chuckle] We work very diligently on those things. We have a short-term transition plan in place, we have the funding mechanisms in place, life insurance, disability income, and we've got the role optimization, MITs (Most Important Tasks) at work, I've got the five-year model that we're working with. So all the things that we're really bringing to the market for our clients, we're really... We've seen the benefit of our sales. That's gives us conviction to say, "You know what, we've seen how this works. We've see the collaboration effect on profits." And to create a really sustainable model that can grow beyond the founder. So we have a conviction about it.

51:41 Sean: What kind of challenges have you all wrestled with, when it comes to that?

51:46 David: Well, I do think sometimes when you think about the vision question you're always trying to balance risk and reward, can we invest in this, can we spend this money here or not put this money, is it the right timing and there's always gonna be a level of risk and you don't wanna be foolish about some of these things, so you have to have a good balance in the team of let's get out there and have a big vision, be overly optimistic, somebody on the team probably needs to say, hey, wait a second can we really do this, is this reasonable, can we really accomplish this target or is there a better way and having some of those I think fierce conversations or authentic disagreements that result in some type of a consensus at the end is the way to go but I think ultimately it does take a courageous vision because you're gonna have to assume a certain level of risk and I think it's kinda like the star tell principle mission in good to great that we talk of many years ago he said, knowing that what you will ultimately prevail regardless of the difficulties you're gonna have to face as a group.

53:09 Sean: Any, good... Go ahead Russ.

53:13 Russ: Yeah, I think at the end of the day the reason that the work that Legacy that we provide our client, the reason that we're needed because it's not easy, and what we talk about is the fact that you're typically gonna do this one time, it's not something where you created and you continue to do it over, over, over you update it on a annual basis, you look at your short-term plan, your long-term plan and say, hey what things that changed but all of the emotions and the things that go along with some of these psyche from the psychological perspective of opening up as the owner, inviting other people into certain parts of the conversation, pulling the curtain back and letting people see some of the finer details of the finance and different things like that, welcoming other thoughts and thinking into the decision-making process all of that is just...

54:12 Russ: You don't do it a lot, you're working on running your business and that's not what you think about on a day-to-day basis so you need somebody to help you go through that and you're typically only gonna do it once, so you wanna make it sure right the first time and so when we... That's because we have also gone through the majority of it, we're in that long-term phase where we're waiting on certain things to develop, give time to it and growth kind of questions and so we're working hours out now versus the planning stage of it when you go through that there's a level of not just an authoritative voice in perspective we can bring so these are the best practices but there's a level of empathy, where we'll be able to say, hey, this isn't easy, we get it, this is not easy, this is not easy, this is what we're going through but we're gonna make it, it's collaboration we're gonna make it through, it's a part of the journey of pulling these different things, these planning steps together.

55:18 David: Well, another part of this Sean, if you think about the strategic plan you started going out five years and you saw how we're gonna do that, it was hard enough to just get where we are now, but can we keep doing this?

55:29 Sean: Sure.

55:30 David: And what happens is that you have these surprise insights that come to you and sometimes it's strategic, sometimes it's from just a tax planning, sometimes we discover some things that we can do from a tax planning standpoint that make it much more efficient for the business owner to be able to extract or agree on a tax-favored basis that's a game changer but you don't know all those things when you start down the road, discoveries are made as you go along.

Closing Remarks

56:05 Sean: Absolutely, now, in terms of closing remarks is there anything important that we haven't talked about today that you think would be essential for our audience to know about when it comes to transition planning?

56:25 David: Well, one thing that we were talking with a business owner yesterday, this is really one of our clients from many years ago who had developed a really nice business and he had identified a young person as the successor and we helped them got with the attorney, worked out a transition plan for them before the transition plan could be realized he had stroke and he was disabled but now the business is thriving beyond him so the part that we started thinking about was, think about the impact of that, if a business is really focused on the customer delivering a quality experience to the customer and then the employees are winning, they'll have a healthy lifestyle, they're able to aspire towards some of their financial objectives, the company is able to sustain itself and the shareholder is able to win that has so much good that happens. What better impact on the culture than a healthy business that is really trying to create these wins for everybody, it's really an amazing good in our society.

57:46 Sean: Yeah, excellent, well, excellent conversation. This has been a lot of fun chatting with you on this.

57:55 Marc: Thank you Sean.

57:55 David: Thank you Sean.

57:55 Russ: Thanks so much.