Succession Planning
Most business owners want their businesses to survive after their own retirement. Survival of the business allows for the payment of retirement income and gives a sense of accomplishment to the founder. It can also be a valuable source of future income and employment for family members.
So why is it that only 30% of family businesses survive into the second generation and half of those disappear by the third generation? The answer is that succession planning is very difficult to execute, and many business owners never even prepare a plan.
A succession plan must first determine the primary owner’s options for liquidation of ownership in the company. Options include:
- Sale of the business to outsiders
- Liquidation of the business and sale of its assets
- Sale of the business to employees individually
- Sale of the business to employees through an ESOP
- Gift of ownership to family members
- Plan for disposition by estate after death
- Sale of the business to partners
- Sale of stock in the public market
If the succession plan involves the continuation of the business by employees or family members, then planning must focus on management activities and a transition process. When owners view retirement as an event rather than as a process, they are aiming for failure. Successful transition involves the transfer of management responsibility smoothly over time.
The business owner must identify the right individuals to run the company into the future and effect an orderly transfer of power to those individuals. Other individuals, family members in particular, may participate in the ownership of the firm, but a successful plan will identify the most capable individuals as decision makers.
The third, and perhaps the most difficult part of succession planning, is coordination. Both the ownership plan and the management plan must work for the business to survive. Combine that fact with the prospect of an estate tax on the value of the family business. Lack of coordination can result in a distressed sale of an otherwise thriving business. Coordination will take into account the need for buy/sell arrangements, life insurance policies, voting trusts and other tools that your professional advisors can explain.
