Chances are, you view succession planning as just one more decision you’ll have to make regarding your business. Through the years, you’ve probably had to make some tough decisions. You’ve hired many good people and you’ve fired people, too. You paid rent or you bought a building. You may have lost sleep some nights, but your business is your pride, your passion and your joy.
Before writing a succession plan off as just another one of those tough decisions, consider this: While 81 percent of family owned businesses want the business to stay in the family, studies have shown that without a succession plan in place, 70 percent of family businesses don’t survive to the second generation. And only 12 percent survive to the third generation.
Your business goes on from day to day without anyone knowing what would happen tomorrow if you were suddenly no longer able to manage the business. Without you, what would happen to your business?
Even though there is a real and obvious need to prepare for the future, many business owners offer different reasons for not having a succession plan. For example, you might think you’ll eventually sell the business, or you aren’t yet sure what your children will want to do, or you’re afraid of making the wrong decision. Despite some good reasons why you may not have a family succession plan in place, an overwhelming majority of business owners want their businesses to stay in the family.
Invest in the future of your business
Succession planning is an investment in the future of your business—for the owners, your family, your employees and your clients. Planning is the key to future success for those whose efforts have helped grow the business. The existence of a succession plan emphasizes your commitment to your business’ long-term growth and creates confidence with customers, clients, lenders, employees, service providers, vendors and other key suppliers.
Here are some reasons why you should invest the time and expense of creating and implementing a succession plan:
- Assure or improve the likelihood of the business’ continuity.
- Retain key employees that rely on the succession of the business.
- Reduce taxes and waste that are prevalent with no planning or poor planning.
- Your legacy as a founder continues, as your business will not disappear or be absorbed by competitors.
- The plan monetizes and places a valuation on your life’s work. It can also potentially capture the value of the business for heirs, estate, family and your spouse.
- The plan creates needed retirement income.
You always have to consider that by investing in the future of your business, you’re really protecting its current value. Your key employees will feel more secure and you don’t have to worry about losing them to outside job opportunities. And it never makes sense to pay needless taxes or waste your precious resources.
By investing in the future of your business, you’re also investing in your own future. The proper design and coordination of estate, business and retirement plans can allow for income to be paid (deferred compensation) to the founder through cash flow and for benefit plans that are set up to reward the present owner. These plans also ensure the smooth transition from you to the next owner of the business.
What is needed to accomplish a good succession plan?
Before you embark on developing a succession plan, always keep in mind that you’ll need courage and a sense of humor. You’ll also frequently find yourself wearing the hat of a psychologist. After all, when you’re dealing with families and finances, you’re dealing with some complex, emotionally charged issues.
Succession planning is usually the hardest part of the financial estate plan because of the level of qualitative issues. This is not just about numbers, taxes and legal documents: There are significant issues surrounding equal financial benefit given to children, both those who are in and those who are out of the business. There is also the need for income to be paid to the surviving spouse. These qualitative issues can be emotional, yet they are the key drivers that determine what happens next.
Developing a succession plan is a process that is done in three phases
First, what’s the value of the business? As the size and scope of the business grows, the need to establish ongoing assessment for the valuation of the business becomes more important and is essential for the overall estate planning. There is also the reorganization of equity. During this critical first phase, wills and trusts are reviewed, and, if needed, are updated. Existing insurance policies are also reviewed and updated.
Second, buy-sell agreements are drafted. There are four basic types of these legally binding contracts: cross purchase, stock redemption, wait-and-see and oneway buy-sell. Each type of agreement has advantages and disadvantages, and you should understand them thoroughly before you choose one.
Third, employee incentive plans are created and implemented. Your business’ compensation procedures are reviewed and analyzed to determine if any changes need to be made. This is also an ideal time to identify those with the potential to assume greater responsibility in the business in the future.
Throughout these three phases, it’s critical to keep an open line of communication with all parties privy to the succession plan: family members, employees and other key stakeholders in the business. The preparation of legal documents and the correct financial tools and products must also be chosen and executed to ensure that the succession plan will work. There must always be a provision to have controls in place so the succession plan is subject to annual review to update the business’ valuation, review new rules and regulations governing family succession, and to evaluate changes in tax laws.
Choose the right team to implement your succession plan
These three phases require the counsel of independent professionals who bring their objectivity, expertise and experience to the table. To ensure that your succession plan is complete, you’ll need to work with a team of skilled financial planners, attorneys, accountants and bankers. It’s essential for this group of professionals to have the experience of working together as a team so that they are all working toward the same goal of helping you implement the best possible succession plan for your business. So, choose the right team!
Finally, always keep in mind that choosing to have a succession plan will create more family harmony and reduce conflict simply because everyone knows where they stand. You’ll pay fewer taxes and realize a greater potential for retirement income. In the final analysis, there’s no greater way to preserve the legacy of your business than to create a concrete vision and plan for the future.