Insight

The importance of succession planning

December 2017


When you talk about “passing the torch” in business, you are referring to the concept of business succession. What is business succession exactly?

Business succession is the process of planning what happens to your business once you’re no longer there to run it. Business owners put so much into building a successful business that when it’s time to retire, passing control to someone else — even their children — can be very difficult. Add in family dynamics, legal, financial, and tax considerations, and many business owners try to avoid the subject entirely. But that’s a mistake.

Is the topic of business succession getting much attention in the business community right now?

It’s already a big issue, and it’s going to get bigger. Privately owned businesses are entering a period of massive leadership transition during the next decade. Around 8,000 people turn 65 each day and surveys show that seven-in-ten business owners in the US expect to exit their companies in the next 10 years. It’s only a matter of time before owners are forced to answer important questions about the future of their businesses.

What is the danger of not confronting these issues?

The stakes couldn’t be higher. Without proper planning, owners face adverse financial and tax consequences for themselves and their families. But, by starting early, a sound business succession plan can lay the foundation for a smooth and personally fulfilling transition.

You can almost hear the pushback from business owners now: “Retire?  I might as well be dead.” “Nobody can run my business as well as I can.” “My children will ruin everything I’ve built.”

Exactly! And these are all expressions of the understandable fears that can hinder the planning process. As I’ve said, without proper planning, a business owner can risk adverse financial or tax consequences, or even endanger the future of the business. But a well-defined succession plan can go a long way to ensuring a successful transition and a bright future for everyone.

So, what are some of the steps that a business owner should take to put an effective business succession plan in place?

When building a plan, it is best to start early; create a support team; identify and communicate your goals; and design, develop and monitor your succession plan.

Why is it important to start early?

It takes about five years to implement a successful plan. Add to this the time it takes to explore alternatives and the horizon becomes even longer. This may make retirement feel like a distant concern, yet an unexpected illness, death, or divorce can force you to confront reality much earlier.

It is also important to allow enough time for stakeholders and family members to adjust to and accept your plans. Without their support, you risk alienating family members or losing key employees. You also want to set aside enough time to choose and develop your successor before you step down.

What do you mean when you say, “create a support team”?

Even the simplest succession plan involves financial, legal, tax, and estate planning. So, include your accountant and lawyer in your planning team. Family members and key employees will also help ensure their acceptance of your plan and prevent conflict. Your accountant is probably the best person to run the planning team since tax planning and financial analyses are both important parts of the entire succession planning process.

If we’re talking about a family-run business, are there any specific pitfalls that the owner needs to be aware of?

Well, choosing a successor can be stressful for any owner, even more so if you have several children. Most parents want to treat their children equally, so where the business may be only one asset of the family’s wealth, the owner may decide to allot other assets to children who are not active in the business. If the owner cannot identify a successor – which happens sometimes – it may be time to decide whether to sell or wind up the business.

The best way to manage this type of hazard, of course, is to be clear about your personal and business goals. Your support team can help you articulate these goals and overcome the psychological barriers that often come with discussing personal matters. Once key employees and family members understand your intentions, they are more likely to support your plan.

What happens next?

Once you have considered all the alternatives put your succession plan in writing. But a good succession plan must be flexible. This allows you to respond with confidence if reality throws you a curveball.  Occasional meetings with your advisory team will help you ensure your plan remains current and helps communication between key stakeholders.

Author: Bill Rucci