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Effective Succession Planning Final Steps including Developing a Contingency Plan

There are a lot of bases to cover in developing an effective and comprehensive succession plan. To help you address important considerations and contingencies, and as part of a broader discussion of succession planning, the HBK Dealership Industry Group developed, "Ten Steps to Effective Succession Planning." This article completes the series with steps eight through ten.

Step 8: Develop an implementation strategy

Just as there are many parts to a comprehensive succession plan, there are many areas of expertise required to develop and implement an effective plan. Given our background in the industry and succession planning, and with the support of the HBK network of more than 400 professionals in all financial disciplines, we cover most aspects of the plan, coordinating with an attorney to ensure legal issues are addressed.

The importance of a team coordinator cannot be over emphasized, one who is experienced in the dealership industry and succession planning and is a trusted advisor to the owner. The coordinator will quarterback the team, oversee all initiatives and communicate with the owner as decisions are made and the implementation strategy is developed.

The use of written reports and memos to document the process and lay out the plan, step by step, is helpful in communicating with all interested parties. These reports can be used to:

  • List all critical data relative to the client and the business.
  • Reiterate client goals and objectives for the plan.
  • Communicate all planning decisions and recommendations: what precisely is it that the plan is going to accomplish.
  • Provide the action plan for implementation.
  • Detail the implementation team’s analyses and findings.
  • Improve the dealer’s understanding of the plan and its impact.
  • Provide a launching pad for implementation, that is, the detail of how we’ll proceed.

Step 9: Design a contingency plan

The primary goal of a succession plan is to accommodate the transfer of ownership and management of the dealership to a successor or successors during the dealer’s lifetime. But every succession plan should include a contingency plan should the owner die prematurely, become disabled or otherwise become unable to operate the business. The contingency plan answers the dealer’s question, "What would happen to my family and business if I’m not here tomorrow?"

Because a contingency plan considers the immediate present, it needs to be monitored and adjusted regularly to accommodate current circumstances. A dealer leaving behind a child intended to take over the business but too young at the owner’s death, for example, might have a contingency plan to sell the business or provide interim management until the child becomes old and able enough to operate the business. Whether the business is to be sold or transferred within the family is an important part of the contingency plan. Liquidity to provide for the family’s needs should something unexpected happen to the dealer is an important consideration. One which can involve the use of insurance to provide for the family’s needs for cash.

If an owner’s child is to be the eventual successor, the contingency plan should include a process for objectively determining if and when the heir is ready to assume responsibility. And as always, a plan must recognize the manufacturer’s role in approving any successor.

Steps for designing a contingency plan include:

  • Periodically review the owner’s will to ensure dealership assets are transferred in accordance with his or her wishes in the event of an untimely death.
  • Determine the family’s liquidity needs in the event of death or disability.
  • Identify prospective interim managers if the contingency plan is to wait until a child or other successor is capable of assuming management responsibilities.
  • If there are multiple successors, consider buy-sell agreements to address ownership succession in the event of an owner’s death.
  • Purchase disability insurance where there are multiple owners to resolve any dispute over disability. The amount of the disability benefits are often less important than having the ability to use the insurance company as a third-party to determine whether one of the partners is disabled. If the insurer will pay the disability claim, then the insured is considered disabled for purposes of ongoing management.

Step 10. Monitor and adjust the plan

Succession planning should be part of the overall dealership strategic plan. But it is also a dynamic process that needs adjusting based on the dealer’s changing goals and life circumstances. The frequency of review varies depending on the owner’s needs, but we recommend at least an annual review. Not only changes in the owner’s personal life will call for adjustments, changes in tax laws, economic conditions and even in manufacturers’ sales and service agreements can create the need to redefine goals and objectives and reassess and adjust the succession plan.

This concludes our series, "Ten Steps to Effective Succession Planning." In subsequent articles we’ll examine peripheral issues, including how to overcome resistance to succession planning and how to groom successors and retain key employees.

Rex Collins is a Principal at HBK CPAs and Consultants. He directs HBK’s National Dealership Industry Group, which provides tax, accounting, transactional and operational consulting exclusively to dealers. Rex can be reached by email at rcollins@hbkcpa.com; or by phone at 317-504-7900.

About the Author(s)

Rex is a Principal of HBK CPAs & Consultants and directs the firm’s Dealership Group. He has worked extensively in the dealership industry since 1984 as a department manager, a general manager and an owner, as well as providing tax, accounting and operational consulting services exclusively to dealers as an independent CPA.

This experience includes working closely with hundreds of dealers from coast-to-coast since 1987 on creative tax planning and financial statements issues. He provides clients with a wide range of transaction work services, and consults for them in specialty areas such as operations, government regulatory compliance, valuations and M&A feasibility studies.

Rex is active in many professional associations. He is the current Chairman of the BDO Dealership Industry Group, contributes articles and commentary to dealership industry publications, is frequently called upon to speak to industry associations and conferences, provides expert testimony, and is regularly quoted by industry and the general media.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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