You’ve worked hard to establish your business, and you want to stay actively involved in its future success. So, why would you plan your exit from it now? Well, as the saying goes, “If you fail to plan, you should plan to fail.” You won’t lead your company forever, and statistics show most businesses don’t make it past the second generation of ownership due to the lack of a proper and thorough succession plan.* There’s a reason why countries have clearly established succession plans for their leaders: They keep things running reasonably smoothly. Many don’t like uncertainty in governmental structure, and the same is true for the constituents in business. Employees, customers and vendors all need the reassurance that any transitions will be seamless, or their confidence in your company could erode. Every good business succession plan looks at the short term and the long term. It should detail what will happen if the unforeseen occurs (e.g. disability or death), as well as how you plan to turn over ownership and management upon your eventual retirement. The benefits of a thorough plan can be achieved by focusing on five key components:
- Address your personal financial needs. For most business owners, a substantial share of your personal assets are made up of your business assets. You’ll be counting on them to fund your retirement. How will you turn them into cash or income? A good succession plan helps you make the most of your investment in the company.
- Minimize taxes and avoid tax pitfalls. In the event of a loss (such as the death of a key business member), planning could identify where there is a need to provide for tax consequences. The inclusion of business succession strategies in your overall estate plan can also provide you with the opportunity to maximize return, while minimizing estate and transfer taxes. Additionally, if you plan to keep the business in the family, planning a tax-efficient transfer may help reduce death taxes when you pass away.
- Maximize the company’s value. Business valuation, as part of succession planning, can help you determine the company’s current fair market value and decide if it accurately reflects the dollar amount you had in mind. If so, your succession plan can help maintain that value; if not, a succession plan can help identify ways to bring that value up. It also can prevent your business from losing value during a transition in ownership or control, and could be beneficial in helping you recruit top talent by helping you answer questions about the company’s stability, values and longevity.
- Allow for growth. Identifying and developing future leadership for the organization will ensure that its growth isn’t hampered in the event of a change. You can fill your company’s talent pipeline now by identifying individuals you can groom for promotion, or strengthen the leadership team ahead of time by assessing areas where skills and knowledge are needed.
- Provide contingencies for the unexpected. Having a plan in place to address the unexpected will help everyone involved in the business by outlining the steps they should follow in the event of a crisis. For instance, if a key business member is incapacitated, who will take over? Does that person have the skill set in place to fill the role? Thinking through the possibilities now gives everyone guidance when they would need it most. A succession plan is especially critical for owners of privately held businesses dependent on a limited number of people. Review the plan every few years for changes in key factors, like valuation or identified successors
http://hbr.org/2012/01/avoid-the-traps-that-can-destroy-family-businesses/ar/1