Few events in the life of a business are as important as replacing an owner who has died or become incapacitated. This is especially important for small or family-owned businesses. Unfortunately, too many family-owned businesses do not realize the importance of a well-conceived business succession plan. Studies show that as many as 90 percent of all businesses in the United States are family-owned enterprises, yet fewer than one-third of them manage to succeed into the second generation and only about one-in-ten make it to the third generation.
Why every business needs a succession plan
Any business without a firm succession plan in place runs a significant risk. If this describes you, then you should contact an estate planning attorney to make sure your business has a good plan in place.
Without such a plan, your survivors — including your managers and employees — may have to deal with any number of problems. The business could suffer a liquidity problem during the ownership transition if the tax bite is great enough.
If there is no formal arrangement to transfer ownership, appoint a new manager, or even sell the business outright, then the problems that develop could be serious enough to result in the closing of the business. If there is not a comprehensive succession plan in place, then it is possible for the family to object to the succession. You may also have people take over your business who are unable to own or manage it well.
The primary elements of a good business succession plan
Of course, it is never good for any company to depend on a single person. From the moment you establish your company, you should have a plan in place for when you decide you are either unable or unwilling to continue leading the company. Every business succession planning checklist should include the following:
- a vision of your company going forward without you
- a list of people who will take over for you when you step down
- a comprehensive list of other company leaders
- a method in place for resolving any disputes regarding the succession plan whether by family members or other stakeholders
- a timeline for putting each element of your succession plan in place
What should your business look like after you are gone?
Fashioning a vision for your business after you are gone requires you to examine the current state of your business, and to establish a vision of what it should look like going forward.
Likewise, a set of business goals formulated when you were 25 years old may not be valid 20 years later and may seem even less valid as you approach retirement age. As part of your business succession plan, your vision of the company must be realistic and based on real numbers and realistic projections.
Choosing a successor owner can be tricky
While you may be tempted to just choose your first-born child or your brother or sister to take over your business, you have to consider the implications of choosing the right successor. What if they do not want the business? After all, not all family members may be as enamored with the family business as you are, and they may have careers of their own to consider.
Perhaps you have a partner in the business, and you could leave it to them. That is possible as long as the partner is not silent and is active enough in the business to know how to run it. On the other hand, if your partner is the same age as you, they may have a desire to retire the same time you do. In other words, asking a lot of questions and considering many possibilities for a successor will probably lead to a better choice than simply deciding on your own who should take over for you, should you no longer be able to run the business at some point.
Whomever you choose, consider your successor’s talents. Make sure they can run the business in the way you think is right. Make sure they have enough financial and business experience and success to be able to make your vision come alive. Consider too the option to sell the business outright before you retire, or order it sold upon your death or disability. That is always possible and, depending on the circumstances, could limit the number of family squabbles over it.
How to resolve disputes when you are not present
This is why you create a business succession plan in the first place. It is the same reason you need an estate plan: so you can continue to make rational decisions even after you are either gone or unable to run the family’s affairs. With a valid business succession plan, you get to make all of the business decisions beforehand.
With your business succession plan in place, you and your estate planner or estate planning attorney can direct exactly where you want the business to go, thus eliminating the guesswork that often results in family disputes. If your instructions are clear and concise, there can be little or no room for disputes, which means you can control family problems yourself, even from the grave.
You should take your succession plan as seriously as you do the business itself. Contact Estate Planners of Arkansas today for a free consultation.