By Norman A. Pappas
February 1, 2007
Dear Business Owner or Heirs:
You may never get a letter like that one. You won’t need to. Without a proper plan for the future of your business, your business may not even have a future. Just as your personal will determines what will become of your personal assets, a business succession plan determines what will become of your business. And given the years of devotion and dedication you’ve put into it, the business might very well be considered another “loved one” that must be provided for.
The overall plan consists of two parts: a business succession plan, a long-term strategy for the business when the owner retires; and a strategic contingency plan, a short-term strategy that becomes operational upon the unexpected loss of the owner through disability or death. Together, the plan serves as a road map, steering passengers through the twists and turns of transition from one owner to the next.
Most business owners don’t realize the range of issues involved, and the problems that can arise when no plan - or a bad plan - is in place. Unfortunately, the complexity of the process and the difficult decisions that need to be made often cause the owner to postpone action. But the cost of not planning is high: over 70 percent of family businesses fail to survive into the second generation; over 85 percent fail before the third.
There are a number of pitfalls that trip up the best intentions of owners, families and managers, including:
-¢ Personal issues (family issues as to how to deal with children working in the business and those not in the business).
-¢ Key personnel issues (which employees will stay and who will go).
-¢ Tax issues (income and estate).
-¢ Legal issues (buy-sell agreements).
-¢ Financial issues (such as funding buy-sell agreements, retirement plans and estate taxes).
In order to start the succession plan, you need to do the following:
-¢ Determine your wishes for the future disposition of your business.
-¢ Decide on a successor(s) or owner(s).
-¢ Anticipate and address any family or employee issues.
-¢ Begin to prepare the successor(s) for their future responsibilities.
-¢ Set aside assets that may be required for the transition.
-¢ Coordinate your personal and business finances to provide sufficient retirement income and fund any estate tax liability.
Planning can be a complex process involving difficult decisions on issues, both professional and personal. But the rewards are worth it: a solid foundation for the survival and ongoing success of your business; security and peace of mind for owners, managers and employees; and, often, significant tax and financial advantages for both the owner and the business. Succession planning should start the day you realize you have a viable business to pass on, no matter how far in the future that is. Your plan will work for you and your heirs for decades to come.