If you’re a business owner and you are thinking about retirement, then you need to start thinking about succession planning. It’s critical to the best interests of your family and your finances. It’s also critical to the success of your successor.
A 2018 MassMutual study indicates that only about 50 percent of business owners have a written succession plan in place. Equally troubling is the fact that about one in four successors, those that the owner has targeted to take over his or her company, do not know that they are in the succession plan.
Business owners may be too busy dealing with everyday business needs to consider the tough issues of succession planning. Nevertheless, they should address basic questions that pertain to their individual circumstances, such as:
- Who will be the next operations manager?
- Do I want my spouse to own the business when I am gone or do I want him or her to be bought out? Are they qualified to run the business?
- What if my business partner dies?
- Which of the children will get involved in the business?
- How will I treat my other children not active in the business?
Why does this matter? Remember, the business interest is often the single largest asset of a closely held business owner’s estate. It is often used to provide the majority of current income and support to the business owner’s family. Understanding, and ultimately realizing, developing and implementing a succession plan for the entity, whether because of death or disability, is critical to the continued well-being of the family.
Put a value on your business
Knowing the value of your business is an important first step toward building a sound business succession plan to keep the business viable and your loved ones protected. You should also consider the value of your business if certain events occur or circumstances come about. Consider, for instance, how your business and its value would be impaired if you were no longer running the firm. (Related: How to put a value on your business )
The valuation process should clue you into any immediate problems you need to rectify to secure the highest possible valuation for your business. That’s important not only for the business itself, but those who depend on it: employees, family, and you.
Indeed, as already noted, for many business owners their venture is likely their largest asset and a key component of their retirement plan. So valuation of the business is necessary to reconcile their future retirement income needs with the estimated value of the business to help identify any possible shortfalls. (Calculator: How much should I save for retirement?)
Unfortunately, if no advance succession planning is done before an owner leaves, unexpectedly or expectedly, the firm may not run as smoothly and liquidation is a potential outcome. Most business owners say they want to either transition this business to a family member or sell it to an outside buyer or key employee when ready to step away. Very few, less than 15 percent polled in the MassMutual Business Owner Perspectives Study, say that liquidation is their desired succession plan.
Find a successor
So, how can you plot a course toward protecting your business and minimizing the impact a change in ownership could have? Start with open and transparent conversations with possible business successors and family. If the issues are not discussed and a plan is not put into place, circumstances could devolve after the owner departs. And that could spell disaster for the business and the family, even possibly resulting in a forced sale of the business.
Here are some starting strategies to ensure a smooth transition:
- Encourage your successor to get experience outside the business, ideally 3-5 years with another firm. There are many good business models and operating strategies and at the end of the day the more “new ways of doing things” a business successor is exposed to, the better the company will be.
- Implement a successor development plan . This is a written roadmap that notes the business successor’s strengths and weaknesses and should suggest what additional skill sets are needed.
- Be transparent . Make sure all key people and the business successor understand their roles under the new ownership. Although obvious, remember that more than 20 percent of successors do not realize they are the successors!
- Find a mentor for your successor . The new position of being the boss will be challenging and having an independent person / trusted advisor to rely on can be invaluable.
Like most other things, the earlier you start succession planning the better your outcomes can be. But if you have been putting succession planning off, there’s still time to start now.
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This article was originally published in October, 2016. It has been updated.