It’s not unusual for business owners to put off succession planning. Like estate planning, it’s one of those things people don’t particularly like to think about. But succession planning can smooth the transition when the time comes to transfer the reins to the next generation, reduce the risks involved, and maximize the value for both you and your family.
Here are a few steps you can take to get the process underway.
Determine Your Exit Strategy
Generally, there are three choices:
- Transfer the business to one or more family members (either by sale or by gift),
- Sell the business to your management team, or
- Sell the business to a third party.
Your exit strategy will influence how you structure your business and the techniques you use to maximize its value. For example, if you wish to sell your business to management or to a combination of management and family members who work in the business, an Employee Stock Ownership Plan (ESOP) may provide a tax-efficient vehicle for accomplishing your objectives.
Enhance the Value of Your Business
Start by arranging a professional valuation of your business. The valuator’s report will help you understand the factors that drive the value of your business and identify opportunities to increase it. For example, if the report reveals weaknesses in your management team, or heavy reliance on you or other key people, you might address these weaknesses by bringing in new talent or offering training opportunities to your existing workforce.
Keep in mind that the techniques you use to enhance your business’s value will depend on your exit strategy. Maximizing value for a strategic buyer, for example, may involve a very different approach than maximizing value for employees or family members.
Identify Future Leaders
To help ensure a smooth transition, it’s important to identify and begin developing the company’s future leaders as early as possible. You should also have a contingency plan in the event any key owners or employees die, decide to leave the business, or otherwise become unavailable.
Once you’ve identified potential successors, start getting them involved in leadership activities, such as company governance and strategic planning. And provide them with educational and training opportunities, both within and outside the business. Work with each potential successor to design a customized, personal development plan to ensure that they gain the experience and skills they’ll need.
Understand the Difference Between Management and Ownership Succession
For family businesses in particular, this distinction is critical. Even if family members lack the desire or talent to lead the business, you can still help provide for them financially by sharing the wealth you’ve created in the business without transferring management control. There are many ways to achieve this, including providing family members with nonvoting ownership interests, holding the business in a trust or family limited partnership, or using life insurance to provide liquidity for family members outside the business.
Succession planning can be complex, and each business and family is different. The steps outlined above can help you begin to lay the groundwork for an effective succession plan. Work with your advisors to develop a detailed succession plan designed to help you achieve your business and personal financial objectives.
