Business Succession Plans
What do you do when the senior executive (and often the founder) suddenly dies or is no longer able to function as the leader or simply wants to step down? By Paul NormanAre You Prepared for Departure?Preparing for your (untimely) departure makes good business senseBy Paul Norman
When Dr. Joel Shugar of Perry tragically died in a skydiving accident earlier this year, he left not only grieving relatives, friends and patients; he also left the eye surgery institute he founded without its leader. Other medical professionals have stepped in to carry on the work, but Shugar’s death illustrates the vulnerability of almost any business. What do you do when the senior executive (and often the founder) suddenly dies or is no longer able to function as the leader or simply wants to step down? What kind of succession plan will allow the business to carry on?
Consider this situation: Jim owns a fishing charter business, and has two sons, Pete and Murray. Pete works passionately alongside his father and has a knack for creating promotional activities that bring in customers. Murray wants to run the business and has several “new directions” he wants the business to take, but he never shows up and his brainchild solo business venture, Murray’s Hookah Lounge for Dogs, lasted about as long as Crystal Pepsi. Which one of his sons does Jim put in charge of the business when he retires? What about all of the solid relationships with customers and suppliers that Jim has established? Who should take over the business if Jim dies or becomes incapacitated? How do the bills get paid if that happens? What happens if Jim decides to sell his business?
If you are a business owner, perhaps you’ve thought about how these questions apply to you. It’s also just as likely that you have been so bogged down in the everyday workings of your business that you just haven’t thought of them. There’s no shame in that. Maybe you have been meaning to address them, but just haven’t gotten around to it. Well, I meant to mow the yard last Sunday, but “SportsCenter” was on, and now my wife is mad at me. Get the picture? Good, because you can take care of all of these issues by drawing up a business succession plan.
A business succession plan is a written plan that develops from a process, often involving a series of tough decisions, legal documents, insurance policies or investments. In this process, a business owner arranges for the transfer of the two most important aspects of a business: power and assets. The primary benefits of such a plan are to maximize efficiency and profit during a transition of management, and to protect the business in the case of the owner’s death or disability.
Changing of the Guard
Let’s start by talking about transferring power. When we look at Jim’s situation, it seems pretty clear who should take over the business, no matter what the reason for changing management. However, it’s not that easy when you’re dealing with family. A succession plan allows the owner to minimize conflict within the family and make clear the roles of specific family members in the day-to-day operations of the business upon the owner’s death or retirement. The plan not only spells out everyone’s role in advance, but it also allows time for any hurt feelings to heal.
No matter who takes over a business, establishing a plan of succession allows for a more seamless transition when the time comes for a changing of the guard. A structured transition provides ample opportunity for the business to address future goals under new leadership, as well as for the successor to learn the nuances of the business, build relationships with existing customers and suppliers, and gradually grow into the role of management.
Rather than passing a business along to family, many business owners decide to sell their business either to a competitor or other outsider, or through public stock offerings or employee stock ownership plans. A succession plan is an excellent vehicle for business owners to arrange a sale, and even guarantee themselves a source of income after retirement. For example, numerous business succession plans provide the business owner a position as CEO or on the board of directors, away from the everyday grind, while still reaping the benefits of a positive cash flow.
A succession plan will put the business owner’s wishes on paper and put them in motion, turning the transfer or sale of a business into a series of events, instead of a scramble to figure out the next step. Remember, selling or transferring control of your business is not something that can be successfully accomplished overnight.
Handing It Down
You are not immortal. What better way to leave your legacy than through your business? It is critical that you protect your business and your family in the event of your untimely death or incapacitation. The fact is, a business is often the largest part of its owner’s estate. If the owner dies, estate taxes can eat a large portion of that estate. This situation, in turn, can force the business, including the owner’s family and partners, to take on substantial loans, or even worse, liquidate, just to pay the taxes and make ends meet.
Your business succession plan can serve as a means to protect both the assets of the business and the income generated by it, often by setting up life and disability insurance on the owner, or by using other investments such as annuities. These instruments can provide the capital to pay taxes, service debts, and see the business through the difficult times associated with any sudden change in structure. Your financial advisor can help you create a plan that fits your needs.
Plan Early, Plan Well
By now, you might be thinking, “That’s great, but I’m just about to start my business. It’s too early for me to worry about this!” Not true. Succession plans can offer tangible advantages to new businesses. Businesses with succession plans generally have an easier time obtaining credit from lenders. Also, having a succession plan could inspire your lender to provide you with the option of foregoing the expense of key-person life insurance, i.e., life insurance on the business owner, should you need the extra funds in these cash-strapped times.
So where do you start? Get organized. Decide what you want to accomplish with your business. Arrange a meeting with your financial advisor to discuss your goals. Your financial adviser will probably recommend that you also contact your attorney, accountant or insurance agent. The most important point is that the issues should be worked out in anticipation of the change, not in reaction to it.
The biggest step in forming a succession plan is getting organized, and many people find that the organization required in formulating a succession plan makes their business stronger by forcing them to set goals and stick to them. The basic goals of a business succession plan are not all that different from the goals of a will, and the similar peace of mind it brings is well worth your time.
You do have a will, don’t you?
This article is for general information only and should not be considered as legal advice or counsel. Such advice can only be properly given by qualified professionals who are fully aware of a user’s particular circumstances.