What is Business Succession Planning? Simply, business succession planning is part of the the estate planning process that determines who will take over a business when the current owner retires, dies or become disabled so that it continues successfully.

Managing a business is full of uncertainties with very little in the way of a safety net. Success takes time, strategy, tactics, and sometimes even a little luck. Business owners like us are a breed apart—driven, tenacious, self-reliant, resourceful, proud. Out of necessity, business owners wear many hats. We need to understand debt, negotiate contracts, make payments to employees and vendors, determine efficient pricing, and maintain financial and tax records. However, while great quantities of planning go into every facet of the business, more than a few business owners simply fail to plan for the day when their business will have to go on without them because of retirement, incapacity, or death.

Business owners frequently expect to pass the business on to heirs. Too often, though, they assume this transition will simply take care of itself. Some don’t know who will take over or how to prepare, so they procrastinate. Still others can’t bear to think about the day when they no longer control the business they’ve carefully nurtured. Whatever the reason, the absence of planning has resulted in these startling statistics supplied by the Small Business Administration:

• 90 percent of U.S. businesses are family owned
• 30 percent succeed in the second generation
• 15 percent make it to the third generation

A successful business transfer is not a given—not by a long shot. A business interest is a unique asset, often representing a sizable portion of the estate. Although the business is an intrinsic part of the business owner’s estate, it requires its own special strategies and tools.

Succession Planning: Engineering a Graceful Exit

Succession planning is the implementation of a strategy to ensure the business owner’s eventual graceful exit from the business. A succession plan:
keeps the business viable and valuable
• reduces capital gains and estate taxes
• preserves control of the exit process
• safeguards employee security
• maintains control of the business when family ownership will continue

Business Succession Planning Creates a Known Exit Plan

To fully realize the benefits of succession planning, a business owner needs to prepare an exit plan. This involves answering these questions:
When does the owner plan to leave?
• Who will manage the business when the owner is gone?
• How will the company meet its financial needs when the owner exits?
• Will the owner’s departure affect others?
• What can the owner do to protect business value during the transition?

Does Every Business Need a Succession Plan?

Every business needs a succession plan. Here are the major reasons why:

A business succession plan is an integral part of estate planning. A business owner cannot create an effective estate plan without creating a business succession plan. Consider liquidity needs, for example. The need for liquidity in a business owner’s estate plan is directly related to the succession plan for the business. Will this major asset be sold, managed by the next generation, or liquidated?
Transition timing is uncertain. Not every business owner is eager to retire. Leaving the business can be complex and difficult, especially when the owner is driven, started the business from scratch, and nurtured it over a lifetime. Unfortunately, no one has discovered a remedy for old age or pill that will let us live forever. No one knows when illness, incapacity, or death will strike. Even business owners who never plan to retire need to prepare the business for its inevitable transition.
Failure to plan is a recipe for business failure. Failure to plan can result in chaos if the unexpected happens and the business owner is suddenly out of the picture—chaos the business may never recover from.

How Does A Financial Planner Help Facilitate a Successful Business Succession Plan?

financial planner in business succession planning

As a financial planner, I work with you, the business owner and your other advisors in order to create a plan that accomplishes the goals you have.

Some of the considerations we work through include:

  • Ensuring Stability During Transition
  • Determining the Value of the Organization
  • Equalizing Inheritances to Uninvolved Family Members
  • Identifying Documents and Contracts Needed
  • Determining Funding During Transition
  • Tax Consequences