Five Steps to a Strong Succession Plan

More than 90% of businesses in the United States are family-owned, but fewer than 30% make it to the second generation.  And less than 12% make it to the third generation.  The key reason cited for failure of businesses to transition to the next generation is simply because no business succession plan is in place. In fact, recent surveys show that only 30% of business owners have a succession plan.
 
Whether your business has been in the family for years or you are building it from the ground up, it is critical you develop a succession plan.  Most experts agree that succession planning should begin anywhere from 10 to 15 years before retirement. Even if you are one of those people who believe you never will retire, a succession plan is still needed in the event something unforeseen happens to you, such as a serious illness, disability or even death.
Here are the five key steps to succession planning:

Identify what’s important to you. This means deciding, at least generally, how you wish to spend the rest of your life as well as what you want to happen to your business. Consider holding a family meeting to engage in an open and honest discussion regarding your goals and objectives. Failure to do so may lead to unfortunate and contentious situations that could tear apart not only your closely held business…and your family as well.

Decide who is most capable of running your company. If you have more than one potential successor, consider giving each candidate responsibility for the part of the business for which he or she is best suited.  Look beyond your heirs for the most competent successor. Sometimes key employees may be a viable option through an Employee Stock Ownership Plan (ESOP). If you cannot think of anyone qualified to assume control, you may be better off selling to a third party.

Develop a mentoring program. Your goal is to ensure that your business will continue to run successfully without you. That’s why it is important to spend time grooming your successor to be sure that he or she has thorough training and quality leadership experience. You should even consider seeking this person’s input in the development of the plan. While mentoring your successors, you should also transition your relationship with your customers and suppliers.

Document your succession plan. With the help of your accountant and attorney, write down every detail of how you would like your company transitioned. Your strategy should include choosing the right amount of insurance, maximizing valuation discounts to reduce the tax implications and developing a buy-sell agreement. Share this document with all interested parties – especially family members. Be sure that your succession plan is in alignment with your other estate planning documents including wills as well as the titling of assets and insurance policies. All too often, a succession plan cannot be implemented as intended because it conflicts with these other items.

Review the plan regularly. Do not file your succession document away and forget about it. Changed circumstances – such as rapid company growth, the departure of a potential successor and even significant changes in tax laws – are some situations that may require your original plan to be updated and revised.

Developing a business succession plan should not be done in a vacuum. It requires communication among your family members as well as the team of financial and legal advisers involved in the process. When developed and implemented properly, it can help provide financial security for you and your family for generations to come.
If you would like more information on assistance in developing your business succession plan, please give me a                call at 515-288-3279.

Kathi Koenig, CPA
Partner - McGowen, Hurst, Clark & Smith, P.C.