A management company bridge is best understood by recalling the structure and dynamics of either the Key Manager Equity Bridge or the Control Equity Bridge. Just substitute the management company for the key manager. Circumstances would dictate that there is not a single key manager who can effectively assume the leadership role for any one or more of several reasons. The ownership may not have confidence that any one manager has the moxie, drive, or leadership ability to be the driving force for future success. The key manager with the moxie may have retirement plans that precede the needed duration of the succession bridge. There may other very valuable key managers who would be offended if they were not included in the succession bridge. Rather than run the risk of losing these key players, a management company bridge could be utilized. Most commonly in a Control Bridge, ownership pursues a management company bridge to hedge their bets. It is rare indeed to have a single individual to whom ownership feels comfortable transferring control. What if the control goes to his brain? What if we have a falling out? A management company in the role of the control bridge lessens the personality and relationship concerns relating to a single individual. A management company succession bridge just substitutes a group of managers working as a team for a single individual.
The Pros and Cons
There are advantages and disadvantages of a management company succession bridge in lieu of a key manager equity or control bridge. The notable advantage is the theoretical weight bearing capability of several managers versus a single super-manager. Under the right circumstances a group of organized, motivated managers working as a team can clearly carry more management weight than a single individual. However, in order for this to happen, as implied above, the group must be organized as a team and highly motivated. This does not happen automatically, so one cannot always count on a group being more effective leaders than an individual. Another advantage is that a Management Company Succession Bridge is a tremendous management recruiting and retention program. There are not many of these babies around and when done properly, they are manager magnets. The last major advantage is that a management company has built in continuity. If one manager quits or dies, the succession plan should not be derailed.
The major disadvantage of the Management Company Succession Bridge is that it is a more complex program. To some degree, owners will have to deal with a group of managers rather than just one. This is not as complicated as it may appear from the surface, but from any angle, the package is more complex than a succession bridge utilizing only one person. The documentation required for the management company bridge is also more involved because there is a management entity to address. As we all know, when we have to rely more on advisors such as me, your attorney, and your accountant, the architecture and construction cost of a succession bridge will be higher. Unfortunately, this also means that maintenance cost will be higher.
As with the other structures we have discussed, there are a few fundamental prerequisites for a Management Company Succession Bridge. Your business must have achieved Succession Success. For love or money, the business must be worth fighting for. There should be a strong motivation and drive to maintain family involvement in your business. The costs and administrative challenges of designing and installing a management company must be justifiable. The business must have the marketing momentum and profitability to endure the predictable profit erosion involved in a management transition. Notably, the business must have sufficient size to support a management company. Clearly, the economy of scale for a management company is greater than that of a key manager bridge. The concept of a management company conveys that the business is large and/or diverse enough to have several key managers who are critical to ongoing profitability. The management company scenario is usually a compatible tool to business with multiple locations or multiple divisions that work interdependently. Finally, the management company must have a recognized, respected leader. No organization can successfully set direction and achieve goals with multiple heads. Successful managers are commonly strong willed and expressive. Owners cannot effectively deal with multiple voices each endeavoring to support his or her opinion. Therefore, the managers as a group must have a leader who can effectively represent the interest of all those involved in the management company.
There is significant similarity in the construction of the key manager equity bridges and the management company bridge. However, as reflected upon above, the Management Company Succession Bridge has a few more moving parts that have to be tied together with documentation. With respect to similarities, employment contracts and a stockholders agreement are needed to record fundamental agreements regarding compensation of owners and managers and the disposition of stock. If the owners anticipate continuing to take compensation for services rendered or just as a reflection of ownership, the amount and terms of this compensation is discussed, agreed upon and documented in an employment contract. The specific duties and pay plans for each of the managers should also be nailed down to prevent misunderstandings. Assumptions and promises about compensation and responsibilities will only breed problems later, when the program comes under stress due to a down turn in business or the emergence of greed. Documentation precludes selective memory. The Stockholders Agreement also records stock-related agreements and stipulates the structure of future stock transactions. The Management Company Succession Bridge generally involves the purchase of stock and/or the option to purchase stock. The terms for the purchase of this stock, the terms for holding the stock, and the restrictions on the transfer of the stock are spelled out in detail in this very important agreement. No effort should be spared in addressing the various stock-related circumstances that could impact the welfare of stockholders or the business.
Strategic Operating Plans
Another common feature of the management company bridge is the strategic operating plan. As discussed earlier, the strategic operating plan "futures" the organization. The strategic operating plan provides a record of agreement between ownership and the new management regime regarding where the business is going and how management in general anticipates getting there. In the realm of the management company succession bridge, the strategic operating plan represents two levels of agreement. The initial agreement reflects the united goals and operating plans of the members of the management company. These strategic plans generally come about as a result of a significant extended effort by the management team. Since the management company represents a newly organized consortium of strong-willed, ambitious, confident managers, it is imperative that they exert the effort to achieve unity of goals, vision, and operating methods. In the absence of this unity, the management company succession bridge is destined for trouble that will be very costly both emotionally and financially.
The second level of strategic planning agreement is between ownership and the operating company. After the management company has established its identity, purpose, goals, and operating procedures, the owners interact with the management company leadership to develop a strategic operating plan for the business. The importance of the strategic operating plan is that this agreement, as refined on an annual basis, provides the baseline for valuation of the management company's performance. This agreement, as it is continually refined, provides ownership the peace of mind that there is a clear understanding of what is right and wrong in the management of the business, and provides the management company peace of mind that the business owners will not be changing the rules in the middle of their game.
Loyd H. Rawls, CFP, CLU, ChFC, MSFS, of The Rawls Company in Orlando, Florida, has specialized in family estate and succession planning for closely held, family-owned businesses since 1973. Well respected in his field, Mr. Rawls is a highly requested speaker and has published numerous articles and publications on this subject.