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Lifestyle Succession Plan Webcast
What is a Lifestyle Succession Plan?
Lifestyle Succession Plan
:music: Where do you want to be in 5 years, 10 years, maybe 15? Interestingly, almost to a person the advisors they cannot tell us when they'd like to stop; how that end would likely occur. They really can't see themselves doing anything else. They can see themselves working less hard, having more fun. But inevitably, most advisors, and I don't say this disrespectfully, I think it's true of entrepreneurs in any industry: you get married to the income, you get married to the lifestyle. It's fun, it pays well, and you feel rewarded. Why would you stop that? Answering that question was where we started to figure out what is a succession plan, how do you make it work with this very special industry; this special group of people that we work with. We define a succession plan as a formal, written plan that's designed to build on top of an existing business. To gradually, seamlessly, and very professionally transfer the ownership, the responsibilities, and the duties of running the business to a team of next generation successors. It goes without saying: it's going to take more people than just you. The team that we're going to help you assemble we use a particular vernacular to describe them. We're going to begin with you, the founder. Every succession plan is designed around the goals, the dreams, the hopes of the founder – who we call G1 for Generation 1. Generation 1 brought this company to where it is today. Interestingly, you're going to lead it to where it goes next. But you're not going to be by yourself. Little by little we're going to add to the ranks of the ownership circle. The next group in we call G2 for Generation 2. Generation 2, ideally, will be a larger group. We'd like at least two people there for everyone at G1, if you don't have those people immediately, that's ok, most people don't. Generation 2 might be a son or a daughter. That's wonderful if it works out but if you've got other folks that work with you here's what we're looking for: we need at least a 10 to 15 year gap between Generation 1 and 2. We'll show you later, it's a math problem. Ultimately, generation 2 is going to buy into this opportunity. They're going to earn their way up. They're going to learn from you, and that's going to take some time. So, having a full generation of 25 years is perfect, 10 - 15 years is more than enough to work with to get the job done. At Generation 2 we're not looking for another you. We don't need another entrepreneur. You've done that job, you've obviously done it well. At G2, we're looking for a different type of talent. We're looking for folks who bring a different set of skills and energy to the table. In fact, what G2 brings to the table is another 20 to 30 years of career to invest. Why would they invest it with you? Stay tuned, we'll give you the reasons as we proceed. Beyond G2, you're going to need to widen the team even further. This may not take place for another 5 to 10 years. The next group we call Generation 3 or G3. And we need this same pattern: we need at least a 10 to 15 year gap between G2 and G3. Now, a lot of folks at G1 say, "I may have one person, and I'm not sure about them. I don't have 4 or 5 people" And we expect that's the case. Here's the plan: Generation 1, if you can bring in one person at G2, just one - somebody that wants to be an owner, that you trust, you can work with them and test these theories out on the job every day as your business grows. Generation 2 will help you, and will take on primary responsibility for bringing in G2. And certainly later on their own team of successors at G3. Most advisors in this industry begin the planning process about 10 years too late. So, let's just answer the question: How do you know when to start this process? Tell us, honestly, how many hours a week do spend working on this business? As you get older, as you begin to throttle back a little bit, what would you like this business to do for you? We're going to draw a line here at 30 hours a week. We call this the 30-Hour Threshold. The problem we see is that if you go too far below 30 hours a week, as the 100% owner of the business, it moves into what we call Attrition Mode. Once you get into Attrition Mode, you're going to lose value. When the value of the business starts going down, it's a difficult path to come back from. It's a very slippery slope, the next generation doesn't want to invest in that business. They'd rather go hang out their own shingle. The second step in the process, is to divide the whole spectrum of the succession plan Let's say it's 10 to 15, maybe even 20 years long, that's not unusual at all but to divide it up into a series of steps. And we call these steps tranches. Most of our succession plans are designed around 1, 2, 3, or 4 tranches. A tranche is simply about a 5 - 7 year period of time in which we create an ownership opportunity. Let me show you some examples. In Tranche One we're going to set up a very particular pattern of ownership. Obviously, things start with G1. G1, let's say that you own 100% of this business. It might be a small S-Corporation - you own 100% of the stock. So, what comes next? The second part of the process involves Generation 2, G2. We're going to give G2 the opportunity to come in and buy some ownership from you. Don't give it away, they have to buy it. It's part of learning how to be an owner. G2 comes in and purchases stock like this. The idea is that G2 is going to buy - not your entire company, just a little bit of the stock that you own now. The typical pattern in Tranche One is about 80/20. What we'd like to see is that G1 continues to own at least 80% of the stock of this S-Corp. We'd like to see 2 people at G2. Maybe not equally, and maybe not at the same time. Two people at G2 during the course of this first tranche will cumulatively own about 20% of the company. The tranche will take about 5 to 7 years if designed properly. The point in Tranche One is, we're going to test the theory. Does G2 have what it takes? Do you G1 work well with business partners? Do the three of you work collaboratively together? Have you chosen well the people that you want to be your partners in the future? Those answers aren't clear, and there's no way to be sure except to sell the stock and try it out. The whole point of Tranche One, which we call the incubator, is to step into the process slowly and gradually. Give yourself a lot of room to back up and change your mind if it doesn't work out, but to give Generation 2 a choice, to give them a chance. And to see if they rise up to the occasion of ownership. And If they do, we'll move on to Tranche number two. In Tranche Two the typical pattern begins to emerge. It changes for everybody, but it's not unusual at all to go to about 60 / 40. Now, what's interesting here is we hope that G2 works out well. We'll find out, they'll prove this on the job. But if it works well we'll add on another group. And that's going to be Generation 3. G3 will come in somewhere around the 10 year point. What that means, of course, is you've got time to find them. In fact, what we're going to do is help G2 get ready - learn the ropes, learn what it means to become an owner, learn what it means to work hard and earn the opportunity to buy in. Who best to share that story with G3? It's not you G1, you're still captain of this vessel. But G2, becomes the very best person to go out and take that message to the next generation. Let G2 have the reins - they're owners now, of course, and let them recruit people into your model. They're going to understand what you expect, and what are your standards. They're going to understand what it means to become an owner and how that process unfolds. G2 will have lived it, they're the best persons to tell that story. Some advisors should sell their business, but most really would rather build their businesses. The problem is owner's think they're going to sell, and as a result, that idea becomes a recipe for procrastination. It's not a bad idea, but if you use it as a delaying tactic and avoid facing the inevitable, what it does is It stops you from doing any type of planning. It stops you from building a business that can serve you and your clients for generations to come. Exit planning plays a very vital and important role, but as an advisor I would challenge you: stop and learn and think about the differences. It isn't about choosing one over the other. Build, design something that can outlive you. The fall back plan if your design doesn't work, if you start too late, if you just change your mind and want to go and do something else (that's the joy of being independent, you get to do whatever you want to do) then take and sell the business, get best value, we'll show you how to do that. We do that for a lot of folks. Build first, fall back is exit planning, They're two different things and you need to know the difference. You'll be a better advisor, and plan for a better future if you separate the two concepts and plan with them accordingly.
