Business Succession Planning: The Time to Protect your Company is Now
28 August 2014
You’ve worked hard to start and grow your business. What will happen when you retire? Or if you’re disabled or die suddenly? If you don’t have a good succession plan, your heirs may have to liquidate that company you’ve worked so diligently to build, or dissolve the business entirely. And they may be left with little or nothing.
Developing a retirement plan and exit strategy is by far the most pressing financial challenge facing small-business owners today, according to a survey conducted by CNBC and the Financial Planning Association (FPA). Many of the financial planners surveyed noted that only 20% of their clients had any succession plan in place to ensure a smooth transition. Another study found that only 32% of business owners have a buy-sell agreement that would be triggered by the death of an owner. 1
“Succession planning is one of the most important parts of estate planning,” says Eric Rigby, CPA and financial planner at Rigby Financial Group. “Your closely held business may comprise a large percentage of your net worth. You need to have a succession plan in place, not only to protect your family, but your clients and employees as well. If something unexpected happens, your family needs to know what your intent is, and how to possibly liquidate a very difficult-to-value business.”
The Time to Plan is Now
Succession planning—or more accurately, the lack of it—is the elephant in the room of American business. Baby boomers (people born between 1946 and 1964) make up approximately 25% of the U.S. population, yet they own nearly two-thirds of the country’s 6 million privately held companies with employees, according to the U.S. Census Bureau. This means that over the next 10 to 15 years, close to 4 million business owners will approach retirement age. What will happen to their businesses, especially if more than 75% don’t have a succession plan?
According to the CNBC/FPA survey, 31% of small-business owners say the biggest hurdle to creating an exit strategy is simply finding a buyer. Other concerns include valuing the business (23%), the emotional toll (21%).
Establish What the Owner Wants
The emotional and psychological aspects of succession planning can be just as important to the owner of a closely held business as the financial concerns. This is why many entrepreneurs avoid thinking about handing over the reins to someone else, much less talking about it. These are hard conversations that get even harder as you get older and more attached to the business.
But it’s imperative that you make clear what you want to do with your business in the event that you’re no longer willing or able to continue running it. It gets more complicated if you have children. Would they be a good fit for the business? Do they even want to work in it? Young adults may not know yet what their capabilities and interests are, making the conversation more difficult—another reason for reviewing your succession plan every so often.
Create a Plan
Because every business owners’ situation is different, there’s no cookie-cutter approach to succession planning, which is why it’s wise to consult an expert. Sit down with a trusted CPA, financial advisor or lawyer to begin drafting a contingency agreement or business continuation plan. You may want to draft a buy-sell agreement with your partners or a larger company in the same industry.
Leave as little ambiguity as possible. Think about the answers to questions such as:
- What do I want to have happen to my employees if I can’t run the business? Will a new owner be required to keep them on the payroll for a certain period of time?
- If the new owner is based in a different city or state, are they required to maintain my business in its current location?
- To whom do receivables belong at the day of my death or retirement?
- How much will my estate be paid?
By thinking through these questions now, you’ll help avoid saddling your heirs or partners with expensive legal battles when you’re not there and can’t voice an opinion.
Rigby Financial Group offers extensive services in the areas of succession planning for closely held and privately held businesses. Please contact us for advice and assistance in creating your plan.
1. Massachusetts Mutual Life Insurance Company, “Business Owner Perspectives: 2011 Insights in an Uncertain Economy”, December 13, 2011.↩
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