Every business needs a succession plan. If you are a business owner, you will cease to own and control your business at some point, due to death, disability, sale, gift or liability reasons. If you plan in advance, you may be able to control whether or not your departure is successful.
Your succession plan may be for your benefit (When can I sell this business to maximize my retirement?), for the benefit of your family (How can I pass this business to my family in the best way?), for the benefit of your employees (I want them to be able to carry on the business after I am gone.), for some combination of these or for some other reason.
Why is a plan important? Statistics show that approximately 30% of all family-owned businesses survive into the second generation, 12% into the third generation and 3% into the fourth generation and beyond. One reason businesses don't survive is that there is no succession plan in place at the founder's death, leading to a void in leadership, family fighting, lack of financing or other critical problems. Succession planning is often not started or completed because of the emotional issues involved. The business and the owner often seem like one, and the owner may refuse to relinquish any control. If the owner fails to properly train a successor, the business may flounder.
So how do you begin succession planning? The criteria will vary based on the circumstances of the business and the owner, but fundamental questions are:
•When do I intend to leave the business?
•Who should control the business after me?
•Who should own the business after me?
•How should the successor owners acquire their interest? For no cost by gift, or under my will or by sale?
•If a sale, how will the price be determined?
• Will the purchase price be paid all at once or over time?
•Will the buyer be able to afford the purchase price?
•Who should not own the business? The black-sheep child? Anyone who is not a member of the family?
Each of these questions should be answered under three scenarios – retirement, death and disability of the owner.
The owner must discuss the plan with the intended new owners. For example, does the owner's son really want to run the business after dad? Do the children need money more than shares in a closely held business, meaning they will look to sell as soon as dad is gone? Would the children love to run the business, but they aren't capable – maybe for now or maybe always?
Once the owner has considered these factors, whether or not he has been able to make any decisions, he should consult with his advisers – legal, accounting and financial. They can help the owner realize his goals in the most efficient manner while raising issues the owner may not have considered.
Once the owner makes the necessary decisions and signs the proper documents, succession planning is not over. According to a study by Roy Williams and Vic Preisser, 70% of estate plans fail to successfully transition wealth. People generally assume this is because of estate taxes, economic conditions, bad advice or something similar. In contrast, Williams and Preisser concluded that 60% of the failures were due to issues with trust and communication and 25% were due to lack of preparedness of heirs. If a succession plan is to be successful, it requires participation, monitoring and adjusting by all interested parties.
For most people, succession planning is about selling the business or passing it on to their families, but some high-profile-succession plans have made the news recently. Warren Buffett has long stated that he will be leaving his assets to charity; however, he recently announced that instead of leaving it to the Gates Foundation, he will be leaving it to the foundations started by his three children. He apparently believes his children are now capable of fulfilling his charitable intentions.
And the founder of Patagonia has transferred the voting shares in the company to the Patagonia Purpose Trust, which is designed to protect the company's values and ensure its long-term commitment to environmentalism. Because it holds all voting stock of the company, it controls key decisions, while the company's profits are directed to a nonprofit organization dedicated to environmental protection and fighting climate change.
Succession planning can take many forms. It may seem like something that can wait, but waiting too long could jeopardize your financial future and that of your family.
