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Creating a Succession Plan Document

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Mike Fassler says it’s easy to see why many shop owners don’t have a succession plan document in place: “It’s not fun to talk about mortality,” he says. 

The reality, he says, is that many shop owners will experience a time—planned or unplanned—when they can’t be at the shop. As a succession planning consultant with The Family Business Consulting Group, he’s seen countless situations where business owners don’t have a succession plan in place and their business suffers the consequences.

“A tragedy could happen at any time,” he says. “Owners poured their blood, sweat and tears into building this business and, in an instant, what they built could be destroyed without having an executable plan.”

Creating a succession plan document provides for an orderly transition of both management and ownership. In addition, it reduces uncertainty for other stakeholders, family members and key employees, and ensures you’re not the only one with the know-how to handle certain tasks.

“It’s a period of time that has a high level of uncertainty, so having that succession plan documented and laid out for reference will bring a lot of order to what’s a very stressful situation for the other stakeholders,” Fassler says.

“Under stress, everybody is looking for
a credible source to step forward.” 

—Mike Fassler, consultant,
The Family Business Consulting Group

Even if you feel like it may never happen to you, having a succession plan document is still an important step toward retiring or ushering in the next generation of leadership.

“It’s a leadership opportunity for the owner,” Fassler says. “Outline your long-term goals for the business. Start broad and finish with tactical details. It’s about having great relationships and specific processes that are going to win the day under that period of time.”

While succession planning is a huge undertaking for any business owner, here are a few highlights to get you started.

Creating the Plan

A lot goes into operating a business, and it’s nearly impossible for someone without ownership experience to instantly know what to do.

That’s exactly why it’s necessary for shop owners to have a detailed plan. Seth Thorson, the owner of Eurotech Automotive in New Brighton, Minn., recently completed an ownership transition from the shop’s original owner. He and Fassler outline a few general guidelines to have in place to ensure your shop can keep its doors open if you’re ever away:

Identify a successor. Every shop should have a “number two” employee in place who is capable of taking on the owner’s responsibilities. Fassler says this could be a family member, an existing employee or, as in Thorson’s case, a strategic hire to take over the business. In the document, detail who is in charge and their authority to make business decisions 

“That’s from the simplest, like signing payroll checks and decisions on customer service, to more complex things like hiring and firing,” he says. “Making sure that you spell out the rights of access to funds to be able to pay bills, payroll and vendors.”

In the event of an accident, Fassler says to consider appointing a predesignated interim general manager.

Write job descriptions. Your successor needs to clearly understand every employee’s job and duties within the shop, Fassler says. He also suggests documenting your own tasks so a successor understands the owner’s role in the business, as well.

The family member’s role. Fassler recommends outlining any family member’s roles and their decision-making authority, even if they’re not currently involved in the business. Too often, he says, assumptions are made regarding a family member’s willingness to be involved in the business. 

“You may have a spouse who’s not working in the business, but what if it’s not spelled out what he or she is entitled to upon death?” Fassler says. 

Train your successor. Thorson says that before taking over the business, the shop’s former owner, Will Sawyer, spent three years training him and letting him run the day-to-day operations of the business. In particular, Thorson was trained on the financial aspects, such as the profit and loss statement, mortgage payments, and the two even attended Automotive Management Institute training together. Fassler says it’s important to crosstrain the successor on every task and involve them regularly in processes so they have an intimate knowledge of how those tasks work.  

Create a reciprocal management agreement with another small business owner. Fassler says that another effective practice is to have an agreement with another non-competing owner of a similar business to provide oversight or help the interim management team in the event of an accident. The business owner would act as a mentor, not a manager, and could be used as a resource for asking questions. 

“Under stress, everybody is looking for a credible source to step forward,” he says. “You have this credible source stepping forward as part of the team who knows how to run this type of business. Instant trust is important in a stressful situation for the employees and the family.”

To gain that instant trust, introduce the business owner to the team as part of the succession planning process, Fassler says, and let the staff get to know them.

Have a pre-existing agreement with a CPA firm. Having a CPA firm provide third-party financial oversight can be a huge source of relief during a stressful situation, Fassler says. Create an agreement with the CPA for them to meet with the interim management team a few times a week at the beginning of the transition. Your successor will need to know what bills need to get paid, when they are due and how much money is allocated for certain expenses. The CPA can help you create yearly budgets and bill-pay schedules so those processes continue running smoothly.

Document critical information and location. To begin, the successor will need to know the contact information of your attorney, CPA, financial advisor and any vendors. He will also need to know your bank account numbers and passwords, list of insurance policies and estate planning documents. That information should be secured with your accountant, attorney or successor. The key, Fassler says, is that you’re not the only one with the information.

“If I’m the only one that has access, there’s going to be a process to go through before someone else could have access,” he says. “That could be problematic. Pulling that list together is important.”

Plan for tax time. Fassler says to make sure someone has access to your tax records, the business information needed for tax preparation, and the dates when monthly, quarterly and year-end business taxes are due. He also says to document the process you follow to pay taxes and whether you work with a third-party company.

Transfer of ownership. Shop owners need to have a clean plan when it comes to transfer of ownership. The plan should document who will take over ownership and how the purchase price will be determined. Thorson worked with an attorney to determine this, and settled on a deferred compensation during the training period, a loan assumption for the real estate and a business price based on valuation at the time of the sale.

Communicate with staff and customers. Regardless of your reason for starting the succession planning process, Fassler says it’s necessary to communicate your plan with employees and customers alike. Give employees an overview of how the business will operate without you. 

“Almost all of the policies were mine going forward,” Thorson says. “It made the transition really easy for employees because nothing really changed.”

When it comes to customers, Thorson says they were very open with customers for the three years leading up to the ownership transition. In case of emergency, Fassler recommends having a way to communicate with the customer base that the shop will continue to operate as normal.

“When customers or vendors hear that Joe Smith who owns the shop died, they think they must be going out of business,” he says. “Have a communication plan set up that after three days, you’re going to send a communication to your customer base updating them and letting them know the lights are still on and there’s a management plan in place.”

Keep Building Relationships

Throughout the succession planning process, Fassler says that it’s important to keep building relationships and working on the business. Many shop owners build the reputation of their business through relationships they establish with customers or partners, he says. Shop owners should involve their successors in those relationship developments to ensure they will continue.

What’s more, owners should continue to ensure continuous improvement of business performance, rather than check out. In Eurotech’s case, the business actually experienced significant growth during the succession planning process.

“Will was incredibly good at allowing someone to come in and try different things,” Thorson says. “I brought a lot to the table operationally, implementing pay plans and so forth. We almost doubled the business by the time he left.” 

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