A Values Based Approach to Succession Planning

The following is based on one of The Covenant Group’s clients. All of the names and telling details have been changed.

A number of years ago I had the privilege of spending an evening with the CEO of a 200-year-old family business. Over dinner, he described how they dealt with succession planning. The most important value in their family business is stewardship. His central purpose as the CEO is to ensure the transition of the business from one generation to another. He is working to ensure that his successor inherits a stronger and more vital business.            

For many financial advisors, the issue of succession is central to their business thinking. Yet, in my experience, very few are looking at succession planning through the lens of building a stronger and more vital business for the next generation. Let me give you an example. A few years ago, two partners enrolled in one of our programs. 

The first step in the program was to clarify the intention of the participants. We asked each of them, separately, what they wanted in their business and their life. The senior partner, who was 61, stated that he wanted to retire in four years and to sell his part of the business to his partner for a million dollars. The other partner, who was 39, told me that he wanted to build a successful business and that he was not sure if it made sense to buy his partner’s practice. A succession problem was obvious.

As I explored their shared history and present circumstances, the root of the problem became clear. They had been in partnership for about five years. They initially formed their partnership to share an office and overhead expenses. Each of them continued to manage their own book of business. For a period of time, this worked well. The senior advisor was a mentor and played an important part in the younger advisor’s development. The sharing of expenses allowed both to hire staff and set up a nice office while sharing the risk. They worked on some cases together and learned from each other.

When the more senior advisor was 59, he raised the issue of succession. He was then generating about $500,000.00 in gross revenue. He suggested his partner buy the practice for 2x revenue in six years. He told his partner that he wanted to walk away from the practice with a million dollars. At the time, the younger partner thought this was a fair arrangement. However, over the next two years, a troubling trend began to emerge.

The senior advisor spent less time and energy building the practice; his gross revenue began to decline. At the same time, business expenses were going up and the senior advisor’s net income began to suffer. He became more reluctant to invest money back into the business. From his perspective; retirement was secure. He wanted to spend more time on the golf course. In the younger partner’s mind, the value of his partner’s practice was going down. Yet, they did not talk about it. The younger partner was about to bail out.

The good news is we were able to resolve the differences and get them to a point where they had a shared vision for the business going forward. They both realized their common interest in building a sustainable business.

In Succession Planning, you need to pay attention to three types of common interest:

1. Results
2. Process
3. Emotional

Let’s examine how each of these common interests apply in Succession Planning.

1. Results (Substantive Interests) 
   1. Make sure you focus on the interests of all parties involved in succession. Results focus on the “what” or tangible outcome. In the case of the two partners, the what is to pass on a practice that is worth a million dollars to the senior advisor and generates sufficient value for the successor going forward.
2. Process (Procedural Interests)
   1. This interest is concerned with the “how” or the process by which you arrive at a succession plan that meets everyone’s needs. How will we determine value? How long will the transition take? How will the Succession Plan actually work? Who else needs to be involved? Are all the processes and procedures of interest to both parties?
3. Emotional (Psychological Interests)
   1. The final interest is the emotional state of each of the parties. This interest is concerned with what is going on emotionally or psychologically as you try to reach an agreement. Wanting to “win”, to save face, issues of status or self-worth, are all psychological interests that the stakeholders in succession may have.

In summary, to help these two partners develop a Succession Plan and manage the transition, we had to address each of their interests and find the common ground regarding their vision for the future and their shared values in wanting a successful transition for all stakeholders.

Stewardship became the number one shared value for both of them.

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The Covenant Group is referred to by many as where entrepreneurs go to become Business Builders. They are considered to be thought leaders and authors of the best-selling books, The 8 Best Practices of High-Performing Salespeople, The Entrepreneurial Journey, and The Business Builder.