Does Your Key Supplier Have A Succession Plan?

by Varnum LLP

"Hello Jake, I hate to tell you this but we can't ship your order this week. One of our key suppliers is holding us up."

That's a customer phone call you never want to make. If you are like most companies, a significant supply chain interruption could wreak havoc on your operations. Lines would be shut down, customer orders delayed or terminated, and profits stymied. How likely is it that your business is vulnerable to a serious interruption in supply? According to a recent PricewaterhouseCoopers survey of family-owned businesses, approximately 70 percent do not survive past the first generation, so this type of disruption could be imminent if your supply chain includes such businesses.

Significant OEM's in our region are beginning to focus on the topic of supplier succession planning. Quality and delivery are critical, but years of work to optimize the chain can disappear overnight if a key supplier is unprepared for the retirement, death or disability of its owner. All too often unexpected change results in the close of the business. Reducing the risk of this type of disruption in your supply chain may not be something you thought was in your control. But there are steps you can take to identify the companies in your supply chain that may pose a risk.

The first step is to have thoughtful discussion with each of your key suppliers to understand where they are in the process of planning the transition of their business. Questions that will facilitate your discussion include:

Does the owner have a current business succession plan in place? If not, will he/she agree to put one in place within an agreed upon time frame? You want to know that the supplier has governing documents that are aligned with its business succession plan. For example, who are the company's planned future owners? Do the governing documents clearly state how the future owners will gain ownership interest in the company? If there are multiple owners, is a buy-sell agreement in place? Does the buy-sell agreement suggest how the company will be valued upon the death of an owner?

Does the owner of the company have an estate plan in place? An estate plan typically consists of a Will, Trust Agreement, Durable Power of Attorney and a Designation of Patient Advocate and Living Will. The fiduciaries named in the estate planning documents (i.e., the Personal Representative, Trustee, Agent and Patient Advocate) will have the legal authority to act on the owner's behalf in the event of an incapacity or death. Without these documents in place, a conservatorship and/or guardianship must be obtained through the local Probate Court, which will likely lengthen, or make permanent, the disruption of supply to your business. 

Is the owner's estate plan coordinated with the business succession plan? Fiduciaries named in the owner's estate plan to act on behalf of the company should be the same individual(s) the owner has internally designated to run the company in his or her absence. Without such coordination, a company may end up with a fiduciary that has no prior experience running the company.  This can lead to devastating effects for the supplier and, as a result, your business.

How does the company mentor and train its designated future leader(s)? Preparing a future leader may be one of the most important steps to creating a successful transition of management on an owner's death, disability or retirement. Yet, we find this step is often overlooked. It is never too early to start developing and nurturing future leaders to ensure they are ready to step into the owner's shoes at a moment's notice.

Has the business succession plan been communicated to the management of the company? The manner in which a succession plan is communicated will impact the outcome of the succession plan, sometimes more than the succession plan itself. The PricewaterhouseCoopers survey of family-owned businesses states: "A clearly communicated plan signals that the company is here to stay." This is particularly true when communicating a succession plan to the management (and potential future leaders) of a company. It is imperative to gain the confidence and support of the management team in relation to the succession plan. Otherwise, the company risks driving out important nonfamily members after the departure of an owner.

Is there sufficient liquidity to financially support the owner's family, pay any necessary estate or income tax obligations, and secure the future of the company? Often times, an owner's wealth is tied up in his or her company. For that reason, it is crucial to understand whether there will be enough liquidity in the company to continue to operate after tax and family obligations are met. You want to know the owner has thought this through and has a plan in place.

Subsequent steps to take with your supplier will depend on their answers to the foregoing questions. However, if your key supplier answers "no" to most of these questions and exhibits no interest in putting a succession plan in place, you may want to consider vetting additional suppliers to protect the on-going operation of your business.

Switching focus from your suppliers to your customers, consider this: If your key customer(s) asked you the above questions, would you be prepared, or would you pose a risk to them? Given the growing interest in this area, you may find that having a succession plan in place gives your business a competitive advantage.

All business owners must exit the business at some point. The goal of business succession planning is to have as little disruption to the business (and family) as possible in the event of an owner's incapacity or death. Put your own plan in place, and start the discussion with your key suppliers now.

This article originally appeared in the Grand Rapids Business Journal.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Varnum LLP | Attorney Advertising

Written by:

Varnum LLP

Varnum LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.