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Why Employee Contracts Are So Important to the Succession Planning Process

Business Structuring is a critical factor of the interdependent Succession Matrix®. Business Structuring impacts the nine other factors of the Succession Matrix® and accordingly, those other nine factors positively or negatively impact Business Structuring. For more information on all ten factors, refer to the International Succession Planning Association website at www.ISPAssociation.org.  

Business Structuring actually consists of two sub-factors, Business Organization and Business Documentation. Business Organization refers to the actual structure of the business as a corporation, LLC, partnership, etc. and its alignment to the strategic goals the business has for the continuation of success through the next generation of owners and managers. Business Documentation, as the name implies, refers to the actual documentation that formalizes the business organization as well as agreements regarding the disposition of ownership, leases of equipment and real estate, and contracts with vendors (franchisers, distributors, lenders) and employees. With respect to employment contracts, I am often asked what role an employment contract has in business succession planning. In light of the volume of curiosity, let’s embrace this subject.

Employment contracts can address a variety of a business owner’s succession planning goals and concerns. These concerns are generally divided into personal security goals and concerns and key manager retention goals and concerns.

From a personal security perspective, all business owners seek financial security for retirement. However, a large proportion of business owners have reinvested into the success of their business at the sacrifice of personal financial independence, which incidentally is another sub-factor of the Succession Matrix®.  These business owners (which seem to be the vast majority) find themselves with a very valuable business and limited assets independent of the business. Their natural concern is where and how will they derive income security and the continuation of lucrative benefits after they transfer control of their business to their successors, retire and effectively cut themselves off from a salary, bonuses and the other customary perks of executive employment. Other common concerns for owners who are still financially dependent on their business include what would happen to them if there is a business downturn and they didn't receive dividends and what the source of income for them and their family will be after they retire and/or pass away.  And of course there is the natural concern for how the business owner will continue to have access to health insurance, cars, cell phones, etc. if and when they don’t own stock in the company. 

These are legitimate concerns of someone who has reinvested their earnings into a business so that their successors will have a solid foundation of working capital, equipment and facilities to take them well into, if not through, the next generation. The predictable consequence of these concerns is that the exit strategy will be impeded because of a perception that they need to keep their stock so that they can have confidence that they have a job that provides the needed security and benefits they desire. 


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