Ask most owners of a family company whether they have a succession plan and the answer is yes. Ask whether it would produce the intended outcome if it were triggered next quarter, and the answer gets considerably longer.
Signed is not the same as enforceable
A succession plan is a set of promises about ownership, control and money at a moment of stress. For those promises to hold, four conditions must be met at once. Most plans meet one or two.
The four conditions
- Current. The agreement reflects today’s ownership, valuation and family circumstances, not the ones that existed when it was drafted.
- Funded. The capital required to execute the transfer exists, is accessible, and is not itself inside the company being transferred.
- Authorized. The successor holds the legal and governance authority to act on day one, not a title and an expectation.
- Consistent. The operating agreement, the buy-sell, the estate documents and the lender covenants say the same thing about what happens.
An unfunded buy-sell agreement is a description of a dispute, scheduled for the worst possible day.
Where family companies are especially exposed
Family businesses carry an additional layer: the interests of family members who are not in the business, and the distinction between ownership succession and management succession. Plans that address one and assume the other are the most common source of enforceability failure.
The Succession Enforceability Index™ scores each of these conditions on its own, then in relation to the others, so an owner can see not just whether a plan exists but whether it would hold.