Depending on where you are in your career as an entrepreneur, a succession plan may seem like something for the far future or one of those "back-burner goals" that gradually increases in importance with each passing year.
People are naturally reluctant to think about their golden years or mortality. And business owners are typically preoccupied with the daily tasks necessary to maintain the profitability of their companies. However, failing to plan for succession can reduce a company's worth and increase the likelihood of future conflicts and misunderstandings. That's why it's better to get started sooner rather than later.
Determining Your Succession Planning Goals
Establishing your succession planning goals is the first step. Common goals include:
- ensuring financial security for the owner, family members, and the business in the future;
- maintaining family ownership of the business;
- treating children fairly whether they work for the business or not;
- and allowing devoted staff members to step up and share in the company’s profits.
Owners who want a child or other family member to take over should speak with the younger generation to determine their interest and skill sets. The company is likely to suffer if someone feels forced to take control. Everyone must be on the same page regarding future jobs, responsibilities, and financial rewards.
Transferring Ownership Interests
Many business owners want to sell their companies to family members, employees, or a mix of the two. Transfers of family ownership are frequently accomplished through a gift or sale. However, the best option depends on a number of variables, such as if the owner requires retirement funds.
Gifting can lessen the owner's taxable estate while also making it simpler to transfer responsibility for debts or other liabilities. However, owners who decide to sell have a variety of alternatives for how to structure the transaction. For instance, an installment plan might function as a retirement annuity.
It should be noted that family members will likely pay less for a business than a third party buyer would. Internal transfers, however, can reduce some of the risks associated with external owners, such as culture change. Additionally, there is a higher possibility that the departing owner may be able to retain some control, perhaps through voting shares.
Another option is stock redemption. In these agreements, the business purchases all or a portion of the owner's shares, increasing the remaining shareholders' ownership.
For example, if the owner has an 80% ownership stake in the business and his two children each possess 10%, the owner can sell his portion so that each child will now control 50% of the business. Redemptions must be properly planned out to avoid weakening the balance sheet, and the company doesn't fail to meet any bonding or loan covenants.
A buy-sell agreement could call for a stock redemption. Such agreements frequently use an agreed-upon valuation methodology to determine the stock's price.
Recapitalization and employee stock ownership programs are additional transfer options. Each choice has benefits and drawbacks, including tax implications. Before making a decision, owners should weigh all options.
Training the Incoming Owner
Few chosen successors are prepared to quickly assume the top job of a corporation. A thorough preparation process takes time -- and it is essential.
A thorough training program will assist in assuring lenders and sureties that the leadership will continue to be competent, informed, and reliable. Owners should assess potential successors for any skill or credential shortages so they can address them in advance. Continuing education programs, on-the-job training, long-term mentoring, and hands-on leadership experience may be required to fill the gaps. The management of workers and dealing with lenders, clients, and surety agents are just a few of the responsibilities that might be gradually transferred.
Getting Started with Succession Planning
As the old saying goes, a journey of a thousand miles begins with a single step. The same is true of succession plans. Getting started is usually the hardest part, but once you're moving forward, the final goal is easier to reach. Your professional advisors, like your financial advisor and CPA, make excellent travel partners.