There are many important aspects to running a business and ensuring it’s longevity. One such thing that is often overlooked is succession planning.
We have talked quite extensively on one specific succession planning strategy; the family bank. However, there is much more to succession planning than just the family bank approach, and many steps to succession planning for both family business and non family business alike.
Although succession planning is crucial, the average entrepreneur only spends 8 hours on it in total. Business owners often put in long hours, pour blood, sweat, and tears into their businesses. After years and decades of that level of effort and determination, it is a shame to see businesses fail due to a lack of succession planning.
The lack of succession planning for small businesses is so high, that after 3 generations, only 1/10 businesses remain. In fact, less than 1 in 4 private businesses even have a formal succession plan in place.
So, why is succession planning so important? What are the things that are key to good succession planning?
The Importance of Succession Planning
Often times, businesses are started out of a dream. To have that dream outlive your working years and succeed far into the future is a fantastic feat. However, without proper planning, that becomes exceedingly more difficult.
There is said to be in the ballpark of $68 trillion dollars of wealth to be transferred to the younger generation in the next 25 years. Although some of that wealth is liquid, a lot can also be found in the form of businesses.
As more current business owners phase into retirement, there is a new generation of leaders taking their place. A proper succession plan decreases business disruption, uncertainty, and conflict.
A good succession plan will ensure that the succeeding generation/owners are set up to be successful. However, it will also make sure that the relinquishing owners are compensated and looked-after once conceding control.
The process of succession planning should not be left until the end. Not only does the process often take 12-36 months to get everything figured out, we also never know when it will be needed.
Although everyone may wish to work until age 65 and retire without worry, that is not always the outcome. We never know when unexpected accidents, illnesses, or disasters will strike. These unforeseen and terrible incidents can push business succession to happen earlier than expected and at inopportune times.
However, with a proper succession plan in place, we can be prepared. Although we don’t know how the future will unfold and when unexpected events will occur, if they do, you can have a plan to overcome them.
Keys to Succession Planning
Although there is not a one size fits all for success, there are some standard strategies.
Selecting a Successor
This is probably the most straight forward point. You need to select someone competent, or a group of competent people, who have the skills able to continue operating your business without your management input.
The successor or successors should have all the necessary skills and experience required, and not just be handed the keys to the operation solely because they are family.
An estate freeze is one of the key components of succession planning on the technical side. The estate planning technique is used to lock in the current equity value of one owner while attributing all future equity growth to a successor.
The present business owner would convert their common shares, into fixed-value preferred shares. The newly issued preferred shares will have a fixed value of whatever the owners equity was in the business.
The successive owner would then be issued new common shares. These common shares would have virtually no worth initially. However, all future equity growth of the business would be attributed to the newly issued common shares.
The estate freeze structure can become quite complex. It is also costly and time-consuming to unwind if it is set up incorrectly. Make sure that you are seeking professional advice from reputable accounting and legal sources during the process.
Set Job Descriptions and Timelines
Setting job descriptions and timelines makes the transition a lot easier. The transition of ownership doesn’t (or atleast shouldn’t) happen all at once. The transition should be broken up into stages/steps.
As the stages progress, job descriptions can change to allocate more responsibility to the incoming successor. There should be a timeline for when the next step is to be taken.
Without a timeline for succession, the whole process can get quite messy. The successor may become impatient and become unhappy with the progress. On the other hand, the relinquishing owner may find it harder to give up control.
Having a specified timeline and description of responsibilities and expectations removes a lot of uncertainty. It helps to ensure that all parties involved know their roles and what to expect the future to look like.
When businesses go through ownership/management transitions, things are certain to change. Everyone has their own visions, dreams, leadership style, and goals for the business. However, mentorship is key component to smooth succession planning.
The process of mentorship can be set out in the job description and timeline. If a business is going through a succession obviously what the current owner has done has worked to some degree. Even if old and new don’t see eye to eye on everything, there is a lot that can be learned from each other.
Covering off the Unforeseen
As mentioned above, there are a lot of potential unforeseen things that can happen. A good plan should be prepared to deal with these.
What happens when one of the owners or the only owner dies? How about if a key employee becomes disabled? What happens when a pandemic hits and your business is forced to close temporarily?
A large portion of shifting the risk in unforeseen circumstances comes in the way of insurance. Depending on the structure and the goals of the particular business and the participants, there is a variety of insurance products available:
- Life Insurance
- Disability Insurance
- Business Overhead Insurance
- Key Person Insurance
- Critical Illness Insurance, etc.
There are many insurance products available today. A lot of which can be personalized for almost any situation. When buying insurance, make sure you are meeting with someone reputable. Some insurance products can be quite costly, but if used properly, can definitely be worth it. Make sure that you are going to see someone who knows what they are doing.
If you are interested in getting an opinion on your existing coverage, or understanding what insurance coverage might be relevant to your situation, contact us.
Business owners put a lot of work into ensuring the success of their businesses today. It is a shame to see that hard work be lost in the way of business closures.
With proper succession planning more business can survive the test of time and transition of ownership. Just because a current owner is selling or retiring does not mean the business is doomed. This is actually a time where we can plan out future success.
If you do not have a succession plan in place for your business, contact us. As a business that has/is going through succession, we understand the process. We want to see more businesses have the longevity that they deserve.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy