Develop a sound succession plan for your business
Many large corporations invest substantial resources in succession planning — determining in advance who will assume key leadership positions. Yet, although succession planning may be even more important for small businesses, many owners fail to make adequate plans, or any whatsoever.
This lapse can create the potential for chaos when leaders die unexpectedly or must retire suddenly for health reasons. Spouses who inherit businesses in such circumstances are often overwhelmed and ill-equipped to make decisions about running the business or restructuring it, and existing managers may not know how to proceed. This can result in considerable disruption, and can do irreparable damage to profitability, often leading to closings.
Sound succession planning is imperative to avert such disruption, preserve profitability and sustain the enterprise.
Some points for owners to consider:
Act now; don't procrastinate
Succession planning is akin to preparing an estate plan. Just as people put off writing a will because it means contemplating their death, business owners put off succession planning because it means envisioning the end of their involvement with their business. It can take months — or even years — to assemble a detailed succession plan because this involves numerous decisions, including whether certain employees or relatives (in family businesses) are qualified for top leadership positions.
Once potential successors are identified, firms must sound them out on whether they’re interested and committed, which can take these candidates a while to decide. Often, candidates need to be shown parts of the business that they may not be familiar with and undergo new training. As all this can be extremely time-consuming, it’s often necessary for owners to start the succession-planning process several years or even a decade before their retirement target date.
Also, a succession plan may entail complex earn-out provisions under which non-family successors gradually acquire the equity of those they’ll follow as partial or full owners. Detailed planning for funding these scenarios is essential.
Seek good advice
Some qualified financial advisers offer succession-planning guidance, but this often requires a team involving other qualified professionals, including legal, insurance, tax-planning and money-management experts. In these cases, your adviser should serve as your quarterback to bring in objective, qualified professionals in these fields. Also, precise valuations are often needed. This is a highly specialized accounting task that requires expertise from specialized firms. An experienced financial adviser should be ready to assist you with all of this.
Keep it fresh
If you’re on top of things and formulate a plan well in advance of needing it, make sure you revisit it periodically to evaluate whether all provisions still make sense for your business as it evolves, and make changes where appropriate.
Don’t confuse succession planning with merely buying insurance.
It’s not uncommon for insurance salesmen to aggressively solicit high-commission life and disability insurance sales from business owners. Instead, as when investing prudently, begin with a thoughtful, detailed plan. If you determine that you need more insurance to address scenarios such as buy/sell agreements, loss of key persons or disability, be sure to seek out the guidance of a financial adviser who is paid only for his or her advice, and receives no commissions for recommendations.
By starting early — now, if you’ve been putting it off — you can assure an orderly transition of leadership and sustain your business’ vitality, for both yourself and your family.
Tim Decker is president of ISI Financial Group, a wealth management firm in Lancaster, and a fee-only financial planner. His weekly call-in radio show, “Financial Freedom,” airs Saturdays at 10 a.m. on WHP 580 AM.
This content is based upon information believed to be accurate by ISI Financial Group Inc. However, it is not intended to provide specific financial advice. Investing involves risk, including the loss of principal. Past performance is no guarantee of future performance. You should always seek professional guidance before making any financial or legal decisions, as everyone’s needs are different.