It seems that business owners like to plan ahead—except for when it comes to a succession plan.
Nationwide's 2017 Small Business Study conducted by Harris Poll found that 60 percent of the 350 business owners they surveyed did not have a business succession plan in place. (Respondents were "small-business owners of companies with less than 300 employees.") Amazingly, 47 percent said they do not think it is necessary to have one.
Even those respondents who did have a succession plan hadn't fully committed to it—less than half (48 percent) have discussed their ideas with an attorney or financial adviser.
Business owners often don't think about what will happen to their business if they leave, retire or die. Most companies are not ready for this eventuality, thereby threatening the future of their business and leaving family members, partners and employees unprepared when the unthinkable happens.
The following tips can help business owners create a succession plan that can help them protect their business and loved ones.
1. Formulate goals beyond making a profit.
As soon as the company starts to make a regular profit, business owners may want to think about how they will use it and how this merges with the overall business growth strategy.
Who will the company assets transfer to after the current owner? This can be a family member, a partner, employees or a future buyer. If it is a family member, consider who has an interest in being in the business and what they will do with it.
2. Talk to a professional about your succession plan early.
Too many business owners go through the process on their own without hiring trained professionals. When these advisors eventually do join the process, many are asked only to discuss financial products or other mechanisms to use during the actual succession.
Business owners can benefit from having professionals involved early since they have proven expertise and therefore can avoid many of the mistakes that typically happen in succession planning. Depending on the plan, the ideal team can include an attorney, an accountant, a financial planner and insurance professional.
3. Make a plan for spouses and partners.
One effective practice includes a buy/sell agreement, which enables the spouse of a principal to be bought out of the company in the event of that partner's death.
In addition, many business owners with financial partners have a “key person" insurance policy. Funds from this insurance typically buy the stock back from the spouse as agreed to in the buy/sell agreement instead of passing it to them or the deceased's estate. The proceeds can also be used to help hire a replacement or proceed with an another transition plan.
4. Realize that all things are not equal.
Every shareholder does not need to have an equal share in a business owner's succession plan—doing so may not be in the best interests of the company.
Voting shares can be used for shareholders who make decisions on company policy and non-voting shares can be used for those who have ownership, but are not really participating in the company.
5. Be transparent.
Business owners should be transparent about what the succession plan is to all the stakeholders, especially their family, as soon as it is decided. There should be no surprises when the time comes for any transition. Letting everyone understand exactly what the process will be and who will be involved over what period of time can help decrease confusion.
6. Train your successor.
It's hard for someone to take a business owner's place without training. Business owners can start this process early and train a primary and a secondary person.
While business is full of surprises, try to formulate a rough time table for acting on the succession plan in case an event requires it to happen.
7. Determine how the business fits into the overall owner's estate plan.
Business owners may want to think about how the company relates to the other assets that will be in their personal will—especially since the business' financial value can be a large part of it. Looking at the bigger picture may help the owner balance what they leave to which people.
8. Figure out what retirement after succession looks like.
This is typically a very difficult question for many business owners to answer since they have been working most of their lives. “Playing golf" may not be a satisfactory answer in the long run.
Many business owners get involved in advising other companies or working with charities after they retire. Thinking about what happens the day after can be just as much a part of the succession plan process as appointing a successor, so try not to skip it.
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