Succession Planning - Having a Plan Is Just Part of the Equation for Ensuring Survival

Written by Kevin Hines , CPA, MST, CVA, CSEP, As seen in the March Issue of Business West

It is very difficult for a business owner to transition his or her business to the next generation or even sell to a third party. It is commonly accepted that fewer than one-third of family-owned businesses survive the transition from the founder. And one-third of those that do make it do not survive the departure of the second-generation owner.

There are many emotional reasons for this. However, I will leave this side of the business transfer to the very capable group of professionals that specialize in this area. This article will review some business strategies that you can begin with so that you are moving ahead with a map, and are prepared for when the opportunity for transition is ripe.

Why Succession Planning Is So Important

According to the U.S. Small Business Administration, there were about 27.5 million small businesses in 2009. However, fewer than one-half of these businesses have succession plans. Common reasons include resistance by the owner to let go of control of the business, fear of retirement, or inability to find a suitable replacement. The business may be one of your most prized assets, and securing its value is vitally important for your family survival and well-being.

Just as an individual should own some amount of life insurance as a hedge against a catastrophic event, so should the business owner have a succession plan for his or her closely held business to ensure survival.

Balancing Family and Business Goals

The financial security of the family should be a strong consideration in any business-succession plan. The plan should be in place well in advance of when it is needed. Developing a written road map — which outlines a detailed plan to be carried out and considers various situations or events that might happen — is crucial to the plan’s success. The plan needs to consider untimely events such as disability or even early death. The value of the business asset and continued earning stream is most likely needed to support the family unit in a time of need.

In addition to being a valued asset for you and your spouse’s retirement, the income stream and asset should be protected and secured for future wealth-transfer planning. An example of the importance of this can be seen in the wealth-transfer dilemma where one child works within the business while others may not. Will the transfer of business from parents to offspring be by way of gift or purchase by the ‘in’ child?  How will this impact the overall estate division of wealth to other family members? Or will all children work within the family business? Can the business support a large number of family members within the business?

So many questions … but you can imagine how many issues need to be sorted through in an effort to have a successful transition for the health of not only the business but the extended family as well. At the end of the day, the question that needs to be answered, from Aesop’s fable, is, “should we focus on the goose or the egg?”

Where to Begin?

The best place to start would be with an understanding of your business, inside and out.  Consider performing a SWOT (strengths, weaknesses, opportunities, and threats) analysis.  Know who your strongest competitors are. Know who your key employees are, and assess their strengths and weaknesses. Review your business and personal mission statements to see that they are aligned with your end objectives. Understand the financial value of your business through a business valuation by a competent professional. Determine the best way to transfer your business in a way that meets your personal financial objectives, family financial objectives, as well as any other stakeholders.

Assessing the Options at Hand

Now that you have performed the research and analysis of your business and industry, you can assess the best route to success. You have a choice of transferring the business within the family or outside to a non-family member. You might sell the business outright to a third party or possibly transition by way of a management-leveraged buyout or buyin. The best option may even be a liquidation of the business. The decision is yours; however, it is vitally important for you to get it right the first time, as most often it is your only chance.

Successor Selection

When considering who is best-equipped to take the business forward, you must remain objective. Be guided by the needs of the business, not emotions. Look for evidence of commitment, assess skills and experience, and consider leadership skills and personality. Will this person lead the business as you have, or will they be allowed to manage differently?

An assessment of internal individuals is usually the first course of action. First, is there an obvious candidate who is currently within your family or within your business? Has this person worked within the business so that they have an understanding of it? Do they have the necessary skills to step in and be successful? Identifying the right individual is difficult and risky. You need to be sure that the candidate is the right selection and is willing to take over. Be sure to allow ample time for the transition so that, if additional training or mentoring is required, there is adequate time.