For most family and closely held business owners, planning for succession is the toughest and most critical challenge they face. Yet succession planning can also be a great opportunity to maximize the value of the business. For the majority of them, a significant portion of their wealth is tied up in this very non-liquid asset.
The Sacramento Business Journal recently published an article on business succession planning in which I discuss several factors relevant to the importance of exit planning.
Unlocking the cash behind the business, while maximizing its value during the ownership transition has always been a challenge. It is even more so since the economic slowdown that has and is currently affecting our economy.
In the United States, it is estimated that there are approximately 9.2 million owners of 7 million businesses. Research indicates there are more than 4 million owners of established businesses who are at least 50 years old. 90% of these businesses are family owned. Yet only 30% of family-run companies today succeed into the second generation. An even smaller 15% survive to the third generation. The reason is obvious – the lack of an orderly succession plan.
Owners should begin planning while they’re still healthy and active in their enterprises if you wait until you’re 65 you can’t do many of the jobs associated with succession planning, such as teaching, explaining how the business operates, and passing on the spirit and vision with which it was founded.
Adequate planning time enables you to test potential successors in different roles and evaluate their maturity, commitment, business acumen and leadership abilities. If you’ve already anointed your successor, adequate planning time allows that individual to build up expertise so the transition occurs seamlessly and no one in the company even feels it happened.
Business succession planning should be a priority for every family business because sooner or later everyone wants to retire. For the small business owner, retirement isn’t just a matter of deciding not to go into the office anymore. Besides ensuring that you have enough money to retire on, the whole question of what happens to the business becomes paramount.
Business succession planning seeks to manage these issues setting up a smooth transition between you and the future owners of your business with family businesses, succession planning can be especially complicated because of the relationships and emotions involved and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs.
It’s important to realize that management and ownership are not necessarily one and the same. You may decide for instance to transfer management of your business to just one of your children or key employees and transfer equal shares of the business ownership to all your children whether they’re actively involved in operating the business or not.
Accountants and lawyers who specialize in business succession planning can provide invaluable advice about these tax strategies.
Have you been putting off succession planning? Starting business succession planning five years in advance is good, but 10 years in advance is better. Many business advisors tell budding entrepreneurs to build an exit strategy right into their business plan. The point is, the longer you get to spend on business succession planning the smoother the transition process is likely to be.