Businesses aren’t immortal, but they can live much longer than their current CEOs if their owners formulate a smart succession plan.
Unfortunately, a large percentage of business owners have no succession plan at all. According to Entrepreneur magazine, 25 percent of the people who own shares in a family business and are entering their senior years haven’t done any succession planning, aside from writing a will.
More remarkably, about 66 percent of “high net worth business owners and executives,” people who have at least $3 million to invest, not including their primary home, have no succession plan at all, according to a survey conducted by U.S. Trust, Bank of America’s private bank division. This survey reported that business owners don’t even have good reasons for not having a succession plan.
Why would owners who have devoted a large part of their adult lives to building a business, not think enough about their legacy? Perhaps they believe they don’t have to because they have a written will. Perhaps they just don’t want to think about retirement, disability, loss of the ability to run a business or death. Perhaps they don’t want to communicate their decision about the future of their business because it will tick their children or others off.
Unfortunately, procrastination doesn’t work – and verbal statements about a succession plan aren’t adequate enough to prevent a court battle over the business. A written succession plan is a MUST for all business owners who want their business to survive their ownership.
Why a Plan is Needed
The list of reasons why a succession plan is needed include:
The health of the business owner or owners could decline unexpectedly at any time. If you’re a business owner, do you have a procedure in place now for who is in charge of making crucial decisions when you’re unavailable? Is this procedure in writing? If you’re unavailable for a long time or permanently unavailable, a written plan for how to handle your absence becomes even more important.
Many small businesses don’t have a No. 2 person. If you’re a businessperson, you need to communicate who you feel is the right person to lead the business after you’re gone — and assess the leadership ability of all the contenders. It’s possible that you have a No. 2 person, but he or she just isn’t a leader. You also need to assess who should be in charge of various divisions such as finance. By the way, the U.S. Trust survey reports that 87 percent of business owners don’t expect their children to continue their business. Owners need to talk to their children about their interest in running the business.
Business owners shouldn’t put together their succession plan at the last second. In other words, there should be a few years between when the plan is formulated and when it is implemented. Formulating a succession plan will help the future leaders of a company prepare to be, well, future leaders. They might not have the skills to run a company now, but knowing they will be in charge gives them time to develop those skills and get prepared.
Formulating a succession plan gives business owners an opportunity to make changes that will benefit the company in the long run. Entrepreneur magazine recommends terminating employees who were productive years ago, but might no longer be effective. The current business owner might have retained those employees out of loyalty, but might fear that those employees will damage the company if a successor doesn’t have the chutzpah to terminate them.
Tips On a Formulating a Succession Plan
Any thorough succession plan should include the following steps:
Have an open discussion
Business owners should not formulate a succession plan in private, says Forbes magazine. Talking about the plan with employees gives them a chance to express their future career interests and increases their understanding of what to expect after the owner is gone.
Hire a Financial Advisor
Business owners who have a financial adviser are more than twice as likely to have formulated a succession plan, according to Inc. magazine. A financial adviser who knows the laws will provide the best sort of advice and guidance.
Understand Tax Laws
Can you keep up the tax laws? Who can?! Laws could, and do, change constantly. Business owners need to understand the federal estate tax laws before finalizing their succession plans and need to become familiar with how deductions, exclusions and exemptions can reduce their estate tax bill – and whether they make enough money to need to pay one.
Assess Company Value
Fair market value is defined as “the amount a willing buyer would pay to a willing seller with neither being under any compulsion to conclude the transaction.” Assessing a company’s financial value and listing that value in a succession plan can help the current owner and future owners decide whether ownership should be expanded via sales of stock or transferred via a complete sale.
Finally, a succession plan should include instructions for dividing the successors’ responsibilities, a system for distributing the company’s assets and its stock, and a plan for buy-sell agreements between current business partners and the owner’s heirs and successors.