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The Fundamentals of Business Succession Planning

Business succession planning

Did you know that the majority of the world’s wealth is created by family-owned businesses?

Here in the U.S., family-owned businesses account for 57% of the GDP, employ 63% of workers and number around 5.5 million businesses. So the family business is important, and it’s equally important to protect it.

Business succession planning is one of the key ways to ensure that your business is here for the long-term. Planning helps to ease the way in case of the unexpected and ensure that you enjoy a comfortable retirement.

This is just one of the services we offer at Coker James, so in this article, we’d like to highlight a few fundamentals of business succession planning:

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Why is business succession planning important?

Overall, business succession planning is about making arrangements in case of both the expected AND the unexpected. As a business owner, you fulfill a key role in the running of your company, potentially wearing many different hats. What happens if you want to step down, or if you’re suddenly unable to work?

Thinking beyond the role of the founder or owner, what about other key personnel? You may have someone whom you consider to be your right-hand in the business, but you can’t guarantee they will always be there.

Failing to plan can be bad news for your customers, your employees and your own personal finances. If you or any other key personnel were suddenly incapacitated, your company could be crippled without a clear plan to move forward with.

In some cases, arguments among surviving family members have dragged through the courts until there is little left to salvage. The issue of succession is often deeply emotive among family, and any number of personal issues can add to the complexity of the situation. Even where families are in agreement, if provisions haven’t been made for succession, it can take a long time to sort out the legal ramifications. Only around 30% of family-owned businesses survive to the second generation.

The idea of succession planning is that there is a smooth transition, no matter the circumstances. From the perspective of the business owner, most people would like to enjoy retirement at some point. Succession planning allows you to clear the path for a retirement that leaves your legacy intact.

Business succession planning

Fundamentals of business succession planning

One of the first things business owners should consider is the legacy that you want to leave behind. Most people envisage building something that will last as a result of all their hard work, yet being caught up in the challenges of the present can push out all thoughts of succession planning.

Goal setting

We sit down with clients and discuss their goals first. Everyone has their own unique vision, and every succession plan will look different as a result. The important thing is to have defined those goals and put a plan in place to meet them. Some typical goals might include the following:

  • Specific vision and objectives for the business
  • The extent or importance of continued family involvement with the business
  • Personal retirement goals and cash flow needs
  • Shareholder planning and compensation
  • Goals for the next generation of management

It’s important to take a bit of time to consider the factors that really drive your company’s ability to continue and to meet your objectives.

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Here are a few fundamental areas to consider with any succession plan:

Business continuation

First of all, is your business set to continue once you depart? Many business owners hope to pass on their legacy to the next generation, but some simply want to liquidate their assets and close up once they’re no longer involved.

In either case, you need a plan to see it through. If you were incapacitated and unable to voice what you’d like, for example, you’d be reliant on others carrying out a documented plan. Even under more pleasant circumstances, like a planned retirement, you should have business continuation planned out in advance.

Choosing a successor or successors is a key part of business continuation for businesses that are planning to remain trading. It’s not just about reviewing your organizational chart, but also considering how your operational structure may need to change over time. It’s possible that functional activities, your customer base or your products and services may change as technology or markets change. Which people will be important to have around to meet this future vision? This can involve some strategic planning and analysis of the business environment.

As you plan ahead for personnel needs, you can also put a training program in place to ensure that the right people are able to step in when needed. In larger businesses, this training commonly starts up to 15 years prior to a planned retirement. Management talent assessment is important; what if the family members whom you wanted to hand the reins over to simply don’t have the skills for the job? This sort of scenario has been the downfall of many family businesses.

In terms of a wider view of continuity, think about the structure and processes of your business too. It’s not just about who’s in charge, but about any events or circumstances that could impede the ability to do business. For example, if one person controls all of the accounts and becomes incapacitated, how will the business pay its obligations?

Planning for your retirement

Retirement planning is an important part of business succession and should also start with goal-setting. Whether you want to live a quiet life in Cancun or spend your retirement traveling the globe, business owners should look after their personal welfare and financial security.

For many business owners, it’s not just about a pool of savings, but being able to have sustainable cash flow from the business throughout retirement. If you’re planning on having that cash flow, you need to ensure it is adequate and protected.

Your planned retirement lifestyle and whether or not you plan to keep a foot in the business should all be considered as you set goals for retirement. The important part is ensuring that you’ve mapped out a strategy that will support your desired lifestyle. The biggest mistake many people make with retirement planning is underestimating what they will really need.

Your plan should also consider the risk exposure of your funding (for example, if you have a lot of money tied up in stocks), potential health funding needs, family obligations and tax planning.

Planning to manage debt and taxes

Debt and taxes — one of these is a certainty for business owners! Your business succession planning should also look at these issues from the perspective of handing over the business.

For any business owners that have debt, such as lines of credit for operational expenses, take a look at the terms of the loan. It is most often the case that the lending institution has the right to call in the debt or force loan repayment upon the death or disability of the business owner.

If your business has debt, care should be taken during succession planning to devise a plan for managing the debt. For example, particular assets could be earmarked to pay for the loan should it get called in.

As for tax planning, you will want to consult with a professional to work out how to minimize any tax consequences for transfer of ownership of the company. For example, you might be able to take advantage of a certain level of tax-free gifting.

Establish a decision-making process

Business governance and decision-making are also important to plan for. As an example, you might devise a process for how to involve family members or key non-family personnel in decision-making.

You should also consider a process for dispute resolution. Even with the best of intentions, family business situations can evoke strong emotions. A clear-headed plan can be an invaluable tool.

Along with this, ensure that your succession plan is documented and communicated with family members. When people know what to expect and how the process is to work, it often runs a lot more smoothly.

Business succession planning

Estate planning

There are many facets to estate planning and it forms an important part of your business succession planning too. No one plans on making an early exit, but the point is that no one knows what might be around the corner.

An estate plan encompasses some of the things we’ve already talked about, such as tax planning and a decision-making process. You will need to look at trusts, wills and healthcare directives. You will also need to consider any special requirements you have, such as a need to provide for dependents or to protect assets from incompetent family members.

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Final thoughts

Business succession planning encompasses a range of important decisions for the future of your company, yourself and your family, and your assets. Many company owners put off succession planning, but it can be vital to the future of the company.

There can be several complex issues to plan for, so we recommend using the services of a professional to draw and execute your plan. Importantly for many family businesses, a third-party professional is that vital arms-length from the family and the business.

Business succession planning isn’t an activity for “one day,” it is a vital consideration for anyone in business. It’s easy to get caught up in present-day challenges, but planning ahead ensures peace of mind into the future.

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