SUCCESSION PLANNING: A Must, Not an Option for Investment Managers

Inc.com had a tongue in cheek, but interesting article yesterday discussing an issue being dealt with by both business owners and…Kim Jong-un. While the comparison is humorous, the topic discussed is exceptionally important: Succession Planning.

Succession planning for most businesses is difficult. Any plan needs to be well thought out and comprehensive, but this can be an emotional and uncomfortable process. Although, what likely makes your clients even more uncomfortable is your not having an adequate plan in place.

We've all been told to plan for the scenario, if a senior executive suffers an unexpected illness or is “hit” by the proverbial bus. Even if there is a clear line of succession, how much of the value in a firm is tied up in that person, including their relationships and knowledge? Furthermore, companies, especially service business like investment managers, should be planning for a healthy transition when it is time for a generation to retire or leave the firm.

In either case, when an executive leaves, without proper preparation, clients leave and a firm loses value, and in the case of investment managers, lose assets under management. Companies, especially service business, like investment managers, need to ensure that the next generation is not only capable, but has been involved in decision-making, particularly the future direction of the organization and the investment process.

A departing executive is one scenario, but the need for succession planning is even more important when contemplating a liquidity event to capture the legacy value of your firm through a potential transaction, including but not limited to merger, acquisition, recapitalization and/or divestiture. Succession planning is a series of steps to be implemented over time. The process may start with a simple rebalancing of the equity interest amongst the partners and other important employees to reflect changes in the strategic direction of your firm. On the other hand, it could be as involved as modifying the formation documents of the firm to include the repurchase arrangements amongst the firm and any equity stakeholder upon the termination of their respective relationship with the firm along with a related financing plan and a specific personnel development plan for the next leadership of the firm approved by the governing body of the firm.

The benefits of creating long-term stability for an organization are undoubtedly worth the work of preparing a succession plan.

Lessons Learned: Succession Planning isn't optional.

Lawrence C. Manson, Jr.
Chief Executive Officer
NexTier Companies, LLC