Business Succession Planning
Consider the following questions when thinking about your future, as well as that of your business:
1. Are you ready to let go? Business owners often perceive succession planning as a threat. After all, building a business is a life-long passion. Can you really trust someone to run the business as well as you have? But it's not realistic to believe you can remain in charge as long as you're alive. At some point, you'll have to give up control.
Moreover, don't think of succession just in terms of retirement. It's also crucial to have a plan to address your unexpected death or incapacity. These events are much more likely to cause chaos in the business than your retirement. As a result, succession planning should be seen as more of a continuity plan to maintain your business and family wealth.
2. Are your children ready? You need to ask yourself whether any of your children can run the company properly. Remember families and businesses operate very differently. Many family businesses ultimately fail in succeeding generations because owners made emotional decisions based on family relationships rather than business requirements.
Preparing potential successors requires ample training and communication. Transferring management responsibilities to a child who is not engaged or unable to operate the business competently can jeopardize the financial futures of the business and the owner.
Approach the decision as a business owner first and as a parent second. Since you may have an inherent bias toward your children, seek input from non-family management and other advisors.
If you finally end up selecting one or more of your children to run the company, don't divide ownership with their siblings who may have no interest in running the business. This can lead to disaster in your children's relationships with each other. Parents can use estate planning or life insurance to allocate assets to the children who are not involved in the business so that all are treated as fairly as possible.
3. Who can run the company today if the need arises? If there are owners within the business, consider a buy-sell agreement. Under this arrangement, your share of the company can be sold to your partners or other parties. Often, partners have life insurance policies to finance such purchases.
If you are a sole proprietor, your spouse and management team need to have a plan in place that formally authorizes another person to step in and take control of the company.
4. What level of financial security do you need? Since the family business often represents the vast majority of family wealth, you may depend on the sale of the business to maintain your lifestyle. At the same time, children may want to purchase the business at a reduced price as compensation for a low salary that they earned while working for you.
It comes down to cash flow. If you select a family member to take over the business, is there enough to support your successor and make regular payments to you? If not, selling the business to a third party may be the best option.
5. What will the business look like in the future? How viable is the business over the next five, 10, 15 and 20 years? How much capital will it need to expand and grow the business? If there are limited growth opportunities for the future, do you really want to transfer a declining business to your children? In this case, a sensible course might be to sell the business to a third party now to maximize your family's wealth for the long term.
Communication is the key to making any transition work. Parents, children and other members of the management team have to discuss their respective needs, expectations and fears. They should agree on shared values and goals. If all of the parties are open and honest with each other, then the likelihood of a successful transition is greatly improved.
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The views expressed by the author are the author's alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment, or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
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