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August 24, 2017

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Why Your Business Needs An Orderly Succession Plan

 

 

 

The wife of a deceased business owner wanted to sell his company, but his business partner wanted to buy out the share and continue running the business.  While they fought over what would happen, the partner struggled to finance the buyout and the business value went from a successful $1.7 million to $800,000 in less than a year!


What will happen to your business when you die?  Will one of your children take over?  Will your partner buy your family out?  Will it simply fall apart with no one to operate it?  What happens if you're incapacitated?


Your business has a lot of value to you.  You've put in long hours, made sacrifices, and worked extremely hard to build and run your own business.  You wouldn't want to see it all go down the drain without an orderly succession plan, would you?


You MUST Create A Succession Plan
No matter how time-consuming and burdensome the task, you must make time to create an orderly succession plan.  Have a contingency plan in place in the event you become incapacitated or pass away.  Even if you're young and healthy, you still risk your business every day you don't have a succession plan in place.


About 115 people die in car accidents in the U.S. every day.  That's one person roughly every 13 minutes.  Choking to death in a restaurant, a massive heart attack while jogging--even with a low risk lifestyle, contingencies still happen.  You simply can't afford to wait to make your succession plan.


You'll Lose Value Without A Succession Plan
Why is it so important to have a succession plan?  According to the Small Business Review, only 30% of family-owned businesses survive to the next generation.  In many cases, it's an issue of not having an exit plan.  Failure to plan properly may mean that multiple people fight for control of your business or that your business is rudderless, with no one at the helm to make important decisions or take care of day-to-day operations.  Either way, this can result in a huge loss of value.  Without you at the helm, there are a thousand little ways your business can become less profitable.  Make an orderly succession plan to ensure your business operations are disrupted as little as possible.


Don't Trust The Probate Court With Important Business Decisions
If you don't create an orderly succession plan, then important decisions about your business are left in the hands of the probate court.  In the absence of a succession plan, the court could appoint someone to take over the operation of your business.  You're the person who should be making those decisions, not the court.  If you're not able to run your business, then your chosen successor should take over for you, not a court appointee who may know nothing about the day-to-day operations of your business.


Tips for Creating a Succession Plan
1.  Identify your successor. 
Choosing your successor can be an emotionally trying process, especially if your successor is your child or relative.  It could lead to acrimonious conflict among family members.  Acknowledge the emotional ramifications, but also remember that it's in everyone's best interest to have the most qualified person lead your company.  Your decision should be based on an objective assessment of the potential successor's skills and capacity to succeed in the role.  Consider hiring independent business consultants to evaluate your potential successor's fitness for the role.
2.  If you name family members as your successors, then train them for the role.
Encourage them to work outside your company for several years to get exposure to new ideas and business practices.  After they've acquired substantial professional experience, have them undergo a rigorous interview process to work for your company.
3.  Consider appointing a non-family member as your successor.

If there are no family members who are qualified to take over your company, then consider appointing a successor from among your top employees, or even from outside your company.  Again, have them undergo a rigorous selection process.
4.  Consider offering company stock to non-family employees.

Another possibility is to appoint a family member as your successor while awarding top employees a certain percentage of non-voting stock.  That way, your successor retains control of the company, but your top employees also have an incentive to work toward the continued success of your business.
5.  Work with an experienced estate planning attorney. 

Your estate planner can help you create a succession plan that protects your family's interests, ensures the continuity of your business, and mitigates tax liabilities.

 

If you would like to talk about creating an orderly succession plan, please give me a call at (858) 792-3444.

 

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