Succession Planning Part Two. This blog series will take a look at Common Problems in Succession Planning, Questions Founders should Ask Themselves, and finally Elements of a Strong Succession Plan.
Today’s topic is Questions CEOs/Founders should ask themselves.
Transitioning leadership for a family business presents interesting challenges, and generates concerns about planning for estates, taxes and wealth preservation as well as providing leadership to sustain the business into the future when the founder is no longer at the helm.
Most people don’t like to talk about death or plan for its eventuality. But forward-thinking owners know the importance of planning for their own mortality and the consequences of failing to do so. Many family-owned businesses have been sold, some at bargain prices, to settle an owner’s state tax bill. Others have fallen apart because there was no line of succession for leadership of the company. These businesses suffered the consequences of inadequate succession planning.
A successful transition is a process that takes years to execute. Before transferring your business, ask some key questions.
Do you feel confident you have chosen the best person to succeed you? Be honest and objective when evaluating the strengths, weaknesses and capabilities of the person you want to run the business when you step aside.
Are you financially secure? Have you adequately prepared for retirement? What role will the business plan in ensuring your security?
Have you met with your CPA and attorney to ensure a smooth transition? This is not a time to go it alone. Get professional advice from advisors who have helped many others navigate this change.
Is each step of the transition spelled out? This is a time for strong communication in writing. Make sure you have agreed on contingency plans to address unexpected challenges. All business owners know that change is a “given” that will continue to happen, and your plan should accommodate change.
How will I transfer the business? There are a number of options you can choose for transferring your business to an owner-manager, owner-investor or a hybrid ownership. Choosing the option that is right for your company and your family is a critical decision best handled with the assistance of objective advisors.
• outright transfer
• intrafamily sale
• installment sale
• private annuity
• irrevocable life insurance trust
• redemption, including a buy-sell agreement or cross-purchase sale
Choosing the right option is a complex decision that will vary depending on the needs of the various involved parties.
When should I start to work on succession planning? If you own a business, the time to start is now. No one says it will be easy to formulate a plan, but the consequences of not having one can be serious. A lack of succession planning is often coupled with inadequate or nonexistent estate planning. This combination can result in excess estate taxes, family feuds and general chaos upon the retirement or death of a significant owner.
A written succession plan is vital to at the continuity of any closely held business and the happiness of the owner’s family.