Most business owners fail to understand that, just as there is a human life cycle, there is also a business life cycle. It begins with the conceptual or idea stage, which progresses to the start-up period, followed by the growth phase, then the well-established maturing years, and finally the exit or retirement phase. The most common mistake most business owners make is that they don’t plan far enough in advance for the exit phase. Most experts agree that succession planning should begin anywhere from 10 to 15 years before retirement. Even if you are one of those people who feel that you never will retire, a succession plan is still needed in the event something unforeseen happens to you such as a serious illness, disability or even death.
For the majority of family owned businesses, the largest asset that the owners have is typically their business. They take precautions to protect most of their other assets, such as homeowners insurance to protect their home, auto insurance to protect their car, special riders to their policies to protect other specific assets such as jewelry etc. Yet, 70% of business owners don't do anything to protect the survival and continuity of their business.
Now that you understand the importance of developing a plan for your business, here are the five key steps along with the most common obstacles and excuses:
1. Identify what’s important to you. This means deciding at least generally, how you wish to spend the rest of your life as well as what you want to happen to your business. Consider holding a family meeting to engage in an open and honest discussion regarding your goals and objectives. Failure to do so may lead to unfortunate and contentious situations that could not only tear apart your closely-held business, but your family as well.
Obstacle/excuse: Typically, business owners have given little or no thought to how they wish to spend the rest of their life. They have been too busy growing and running their business. Until they dedicate time to plan for their future, the foundation for a successful business plan remains in limbo.
2. Decide who is most capable of running your company. If you have more than one potential successor, consider giving each candidate responsibility for the part of the business for which he is best suited. Look beyond your heirs for the most competent successor. Sometimes key employees may be a viable option through what’s known as an Employee Stock Ownership Plan (ESOP). If you cannot think of anyone qualified to assume control, you may be better off selling to a third party.
Obstacle/excuse: Most business owners just assume that their children will be taking over the business. As a result, there is very little thought given as to whether their children are qualified or even have an interest in running the business. That leaves the owners scrambling to find a last minute replacement.
3. Develop a mentoring program. Your goal is to ensure that your business will continue to run successfully without you. That’s why it is important to spend time grooming your successor to be sure that he or she has thorough training and quality leadership experience. You should even consider seeking this person’s input in the development of the plan. While mentoring your successors, you should also transition your relationship with your customers and suppliers.
Obstacle/excuse: The biggest issue for business owners with this point is the reluctance to give up control as well as the realization that the business can not only survive, but hopefully even thrive without them.
4. Document your succession plan. With the help of your accountant and attorney, write down every detail of how you would like your company transitioned. Your strategy should include choosing the right amount of insurance, maximizing valuation discounts to reduce the tax implications and developing a buy-sell agreement. Share this document with all interested parties—especially family members. Be sure that your succession plan is in alignment with your other estate planning documents, including wills, as well as the titling of assets and insurance policies. All too often, a succession plan cannot be implemented as intended because it conflicts with these other items.
Obstacle/excuse: Typically, business owners have a knee-jerk reaction and say they know exactly what needs to be done however; they are too busy to spend time with their professional team to put everything in writing. Unless it’s in writing . . . it’s not going to happen!
5. Review the plan regularly. Do not file your succession document away and forget about it. Changed circumstances—such as rapid company growth, the departure of a potential successor and even significant changes in tax laws—are some situations that may require your original plan to be updated and revised.
Obstacle/excuse: Once the plan has been developed and committed to writing, the tendency is to put the documents away and forget about them. To avoid this, an annual meeting should be held with the owner and a few members of the professional team to update and revise the documents as needed.
Developing a business succession plan should not be done in a vacuum. It requires communication between your family members as well as the team of financial and legal advisors involved in the process. When developed and implemented properly, it can help provide financial security for you and your family in addition to future generations.
To learn more about business succession planning, call us at 732-676-4100 or 732-349-6880. You can also click the button below to contact us with any questions.