Do I Need a Management Succession Plan?

An excerpt from Your Multimillion-Dollar Exit: The Entrepreneur’s Business Success(ion) Planner.

“Your Business Success(ion)™ planning process involves determining where your business is today and where it’s headed. … It anticipates the unexpected, in the form of a “management succession plan“ (MSP).

… Your MSP should contain a short-term component that outlines what would happen if you died or became disabled tomorrow. It also will include your longer-term strategy if the unexpected happens, which will vary depending on where your business falls within the three frameworks described in the next section. In addition to your MSP, your Business Success(ion) plan will include a long-term exit plan anticipating that everything goes according to your business plan.

You should address the following matters in the short-term portion of your MSP:

1. Name a Board of Directors or Board of Managers, consisting of the trustee(s) of your revocable trust that will hold and control your ownership interest in the business following your death or disability, one or more family members (who may or may not be your trustee), and two or three of your trusted advisors (who may include your attorney, certified public accountant, and/or a business advisor with familiarity of your business or industry).

If you are comfortable with your choice of trustee, then the trustee should have veto power over decisions made by the board.
If you are not entirely comfortable with your trustee controlling all decisions relating to the business or you need someone else to balance the decision making of your chosen trustee, you could expand the list of trustees of your revocable trust to include some of the same people serving on the board or another person who is not serving on the board who has good business judgment, or give the trustee one vote out of many votes on the board.
In any case, your trust should require the trustee to be bound by the management succession plan, which would include voting in favor of the directors and officers you name in the plan.
Make sure you legally bind the board to follow your short-term plan. This may be for a very short period, i.e., 3-6 months, until the board has had time to determine the best course of action for the company. Each board member should be required individually to accept the plan before being formally appointed to serve.
Establish whether and how board members will be compensated for their service. …

Instead of (or in addition to) appointing a board of directors (or board of managers in a limited liability company), you could create and appoint a board of advisors as part of your MSP.

A board of advisors may consist of some of the same individuals who might serve on your board of directors (or board of managers) but is much less formal than a board of directors.
The primary difference is that members of a board of advisors typically do not act in a fiduciary capacity, whereas a board of directors owes fiduciary duties to the corporation and its shareholders.
These duties include the duty of care in managing the corporation, the duty of loyalty to do what is in the best interests of the shareholders and the corporation, and the duty to administer the business of the corporation prudently.
By contrast, advisors act more like consultants to your business.

Advisors may be compensated in a manner like the board of directors or managers, but their participation in the business’s net profits or net proceeds typically is much less than what a formal board of directors/managers receives, simply because the directors and managers bear greater responsibility and risk.

In either case, your management succession plan should outline the terms on which directors or advisors will participate in business activities and be compensated for their efforts. It also is a good idea to have a written contract with your directors/managers and advisors to specifically state the terms of their engagement, compensation, and nondisclosure provisions protecting your business secrets.

2. Name who will serve (or continue serving) as officers or managers of your company, i.e., the president, chief operating officer, manager, chief financial officer, controller, vice presidents or directors of sales, marketing, manufacturing, etc., if you die or become disabled before the company is sold. If you have the right people serving in the right positions, consider whether the chair of the board of directors or managers should negotiate employment agreements with these folks to give them security and incentives to stay with the company.

You will need to periodically evaluate whether any or all the critical positions at the company can be filled by the existing employees and whether they would be willing to continue working for the company if something happens to you.
You will need to allow existing employees to continue running the business until the board or trustee(s) find suitable replacement(s) or pursue a sale.

The long-term portion of the MSP emphasizes what should be done beyond the 3-6 months after you die or become disabled but before you have had a chance to execute your long-term expected exit plan. It can instruct and empower your board or management committee to take long-term actions, such as interviewing and hiring an investment banker, business broker and other team members to help manage the sale of the business or its assets, or recruiting and hiring a replacement executive team to keep the business running and profitable if a sale isn’t feasible.”

Stay tuned for Wayne Zell's book release in early 2023.