Succession planning is an integral part of any business’s long-term objectives toward continuity. It is important to have a comprehensive, frequently reviewed, and updated plan that lays the blueprint for what happens when the head of a business or other key members of the organization are on a planned or unexpected leave of absence.
Businesses that do not have a succession plan could face many challenges, especially if the departure of the owner is unexpected. However, for small to midsized firms, the challenges could be crippling.
Many savvy firms understand that a Succession Plan is a moving document. It should address short, medium and long-term term absences, but more critically, it should also consider an exit strategy if an unexpected event occurs due to illness, death, or other incapacitation.
The Succession Plan must map out the series of events that should occur during leadership transitions to ensure that it is smooth, organized, and not does disrupt business operations. Failure to plan for leadership succession can result in large, but avoidable expenses. According to a 2021 Harvard Business Review article titled, “The High Cost of Poor Succession Planning: A Better Way to Find Your Next CEO,” almost $1 trillion in market value is lost each year due to poor leadership transition planning. [1]
Failure to plan for leadership succession can also have significant impact on operations and affect the company’s personnel, morale, and financial resources. According to the National Association of Corporate Directors (NACD) article, “Debunking the Myth of the Fast and Successful Succession Plan,” there was an 18% increase in CEO exits in early 2023 with May recording the highest number of such exits. [2] Thus, it is imperative for companies to establish a succession plan to address these areas.
The role of a Succession Plan for both planned transitions and emergency exits is threefold:
- to ensure the continuity of the business;
- to protect the interests of the clients; and
- to provide peace of mind for your family and company personnel in case of an unexpected event.
To begin, your Succession Plan should consider several key areas that will serve as a guideline in preparing for a transition. For example, consider the critical roles within the organization and whether others can internally be cross trained to perform these tasks or will you need to tap into potential candidates externally to fill open key positions. Once identified, you will need to prepare potential successors for the role, provide an estimated timeline for planned exits, and, of course, ensure that the plan meets regulatory compliance requirements.
Even more crucial than preparing for a planned transition is setting up the protocols for unplanned exits.
Some unexpected exits may just be temporary and would require short-term fill-ins; however, it is the long-term, or permanent, unexpected exits that require the most attention. That is why it is absolutely critical to plan for the unexpected to address the question, “Who Does What When I Can’t?”
First, identify the key functions which must be performed and determine if someone internally is able to fulfill those duties. If so, create a Temporary Staffing Plan and assign those roles (such as portfolio management, compliance, client servicing, HR, etc.) to one or more successors who can step in during an emergency.
Next, consider who is qualified to serve as a successor. Dependent upon the role and type of business, the successor may require licensing and be in good standing. For certain industries, such as for advisers in the financial industry sector, the successor ideally should also be appointed with the same qualified custodian(s) as used by the registered investment adviser. This would, with appropriate authorization, permit the successor to provide client servicing and provide instructions related to fee billing (including rebates). In addition, it is important to develop a client communication that can be sent upon a triggering event. For short-term absences, this can include contact information for temporary client servicing staff, or information on how to contact the broker-dealer/custodian in the event the client requires an action (such as a securities transaction or funds transfer). For long-term absences, communications should be customized based on who will be running the business and overseeing the client’s account, which in most cases, will require client consent. In these instances, it is important to work with outside counsel to ensure effective notification occurs.
Finally, in the case of a long-term absence where the principal will not be returning to his/her position due to a triggering event, the Succession Plan should consider the following:
- Will the temporary staff be willing to accept the role/position long-term;
- If the principal is an equity owner of the business, will that principal (or the principals’ agent in the case of death or incapacity) wish to sell his or her interest in the business to the successor; and
- If the principal is unable to find a successor, who will service the clients’ accounts.
Most commonly, in the case of a permanent absence of the majority owner, the business can be sold – either to an outside party, or to other owners or employees of the firm. Many business owners want peace of mind, and to be assured that their loved ones and their clients are well taken care of in the event of their exit.
Furthermore, they want to make sure that all fiduciary duties and regulatory requirements are satisfied and that the business can continue or be wound down (as the case may be). Thus, it is becoming more and more common for advisors to draft a succession plan with a term sheet and asset purchase agreement to reflect the material terms that are desired in the event that the individual’s assets or interests in the business must be sold due to an unexpected event. Doing so provides peace of mind to beneficiaries and staff alike, who would likely be facilitating the transition. As the legal agreement for the sale will substantially already be in place, only minimal steps should be required for the sale, such as obtaining a current valuation of the business, identifying a purchaser (if needed), and completing the terms of the asset purchase and promissory note, as necessary. Throughout this process, be sure to work with experienced counsel who can help navigate the successor’s agent and purchaser with regulatory considerations for the succession.
Author: Michelle L. Jacko, Managing Partner, Jacko Law Group, PC (“JLG).
JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks, and corporate clients on securities and corporate counsel matters, including succession planning. For more information, please visit https://www.jackolg.com/.
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[1] See Claudio Fernandez-Araoz, Gregory Nagel, and Carrie Green, “The High Cost of Poor Succession Planning,” Harvard Business Review, May-June 2021.
[2] See Suzanne Bates and Sarah Woods, “Debunking the Myth of the Fast and Successful Succession Plan,” National Association of Corporate Directors, NACDonline.org, 20 Feb. 2024.