Tools to Make Better Succession Decisions

Effective Decision-Making Tools for Families:

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A component of my “Estate Planning By Design” presentation and workshop is providing suggestions for effective decision making in the ideation of planning outcomes. As part of that presentation, I suggest tools that families and their advisors can use to conceive better outcomes.

A pre-mortem exercise is a useful, adaptable and innovation-generating approach to decision-making that involves testing the efficacy of a choice by envisioning a future where a decision has failed and analyzing that failure to prevent it. When applied to estate planning or business succession planning (i.e. selecting a business successor in a family business or an executor/estate trustee) this exercise can provide deep insights and help avoid potential pitfalls.

A pre-mortem exercise is a technique where decision-makers imagine that a future event has already occurred and then work backward to determine what could lead to that outcome. This anticipatory approach contrasts with post-mortems, which analyze decisions after the fact.

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The Power of A Pre-Mortem in Choosing Your Business Succession Path

Let’s consider a family business that is going through the early stages of a transition plan. They may be deciding between selling the business to a third party and transiting ownership and control to a family member. There are many important steps in any succession path so let’s assume they prefer to first assess selling the business to a third party. Errors can lead to business decline, financial loss, family discord, or worse. The pre-mortem exercise offers a strategic analysis model that allows business leaders to identify and minimize potential failures before a real decision has been made.

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Applying Pre-Mortem to Succession Planning

When considering a sale of a family business, emotions and decision-making biases can obscure the truth and cloud judgment. A pre-mortem encourages objectivity and foresight. Here’s how to apply it:

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1. Gather Your Team: A collaborative team approach adds tremendous value to the process. Include diverse perspectives, not just family members, to get a well-rounded view. Try to include the financial advisor, tax advisor, estate planner, business consultant and other key individuals.

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2. Visualize Failure: Imagine it's five years in the future, and the chosen path has failed. What went wrong? What assumptions were made that, if false, would have undone the entire project? In order to assess failure you will need to know, in advance, how success will be measured. Is it a price? A particular purchaser? A sale timeline? Employee retention? A personal retirement outcome? What is most important to achieve? Determining a measure for success may include a goals-based personal process of reflection. ?

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3. Identify Potential Reasons for Failure: List every possible reason for the failure, no matter how unlikely they seem. Consider factors like leadership skills, market conditions, family dynamics, and operational competence. It is also powerful to consider decision making biases about presumed outcomes that, if proven to be false or overstated, could result in failure.

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4. Develop Strategies to Prevent Failure: For each identified cause, develop a strategy to mitigate that risk. For example, if your internal documentary system is known to be outdated, this may implicate the sale price offered. Find methods in advance of the sale process to improve documentation of employment relationships, client commitments and contract terms.

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5. Implement and Monitor: Apply the strategies and regularly review their effectiveness, adjusting as necessary.

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Benefits of Pre-mortem in Succession Planning

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- Objectivity: By focusing on potential failures, the exercise reduces the impact of personal biases and emotions.

- Proactivity: It allows for identifying and addressing weaknesses or gaps in the sale process preparation before they become problematic.

- Communication: Discussing potential failures openly can enhance communication and alignment among family members, employees and key stakeholders.

- Risk Management: Identifying potential pitfalls in advance provides an opportunity to develop contingency plans, reducing future risks.

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Conclusion

A pre-mortem exercise can illuminate hidden risks and biases, fostering a more informed and deliberate decision-making process. By anticipating what could go wrong, you can take proactive steps to ensure your business's legacy thrives in the hands of the next generation.

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Incorporating a pre-mortem into your succession planning not only aids in making a better decision but also serves as a valuable tool for aligning family members and key stakeholders around a shared vision for the future of the business. By planning for failure, you significantly increase your chances of success.

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Interested in a session for your clients or family on Estate Planning By Design? Contact [email protected] for more information on bookings and fees.