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The following questions and discussions have helped me assist my business clients in developing an organized succession plan:
Do you have an exit strategy for your business? A good plan will address an early sale, your retirement, your death, and your disability. Most business owners with whom I talk are busy working in their business and do not take the time to plan for the business's transition. Succession planning means different things to different people. It is not only about the continuation of the business, but also about the management succession. Who will step in to fill the owner's shoes?
I will address some of the issues a business owner can face regarding business succession.
Early Sale -- Although the plan was to keep the business for many years, some business owners find themselves in a position to sell the business and make a profit. This would result in an early sale. For other business owners, they make an early sale because they are burned out. They are tired. If this were to happen in your business, have you addressed the tax issues? How would you finance the purchase? Would you do a cash buyout, or an installment sale? Would you sell it to an employee? An outsider? These are issues that should be addressed well before the business comes to this point. Obviously, it is not possible to have all the details worked out. But there should be a contingency plan so that if someone offers the owner a windfall, he or she wouldn't be scrambling at the last minute deciding on how to handle it.
Retirement -- Perhaps the owner is working hard to build the business so he or she can sell it and use the assets to fund retirement. On the other hand, the owner may plan to build the business to a point where he or she can retire and have a management team in place to run the business. Either way, a good support team is needed! What guarantee do you have, Mr. Business Owner, that the management team wants to stay in place and work for you? What have you done to encourage employees to stay with you? Why would employees want to continue to work for you when they can start their own businesses? After all, didn't you teach them well? What if a competitor offered them more money and stole them from you? What if one of your key employees dies tomorrow in a car accident? Would you have to come out of retirement to run the business again?
One way to solve this is to identify key people and start grooming them to manage the business, or as an "in-house" buyer. Unfortunately, most business owners do not think about this until it's too late.
Death -- The owner has invested a lot of time, energy, and money to start and build the business. Perhaps he or she has incurred debt: business loans, home equity loans, or credit card debt. I say things like: You may have borrowed money from family and friends. Have you covered this debt properly with life insurance to ensure the debt is paid off in the event of your death? If not, the debt could destroy the business and your family's future. Most business owners have not insured themselves as a key person. They insure cars, trucks, computers, and buildings. Why not insure themself as a key asset? What about income to your family in the event of your death? Will the business be able to continue paying income? If so, will it be enough for your family to maintain its lifestyle? Have you reviewed your business and personal financial plan to make sure they are coordinated to take care of these issues? If not, this should be a high priority item.
Disability -- What if the owner becomes disabled and cannot work in the business? How would the business pay his or her income? There are some serious tax issues if the business pays the owner an income and he or she is not able to perform the required duties. When I ask business owners about these issues, they tell me, "I'd find a way for the business to continue paying me." However, rarely have they ever heard of something called a sick-pay plan. A sick-pay plan would resolve the tax issues. If one of your employees became disabled, how long would you continue his or her income? How long can you afford to pay two people -- the one who is disabled and the one who is doing the job for that person?
Is there a buy-sell agreement? A good buy-sell agreement would address many of these issues. What happens in the event of your death or disability? How is the buy-out structured at retirement? The buy-sell agreement would set the terms for the purchase price, either by a formula or a set amount, and the funding.
Business owners have a responsibility to make sure to protect what they have worked so hard to build. It also is very important for them to build a team around them that is competent. Owners should think of themselves as the quarterback of the team. They should have key players on the team as well as coaches. Owners also should have a financial head coach to assist with decisions and help the management of the team. Remember, it's the owner's "ball." It's his or her business, to grow and protect. Perhaps it's time for the owner to address these issues and start thinking about succession planning.
John H. Curry, CLU, ChFC, AEP, MSFS, CSA, CLTC, has been assisting business owners with their planning since 1975. Mr. Curry is a senior associate of North Florida Financial Corporation and a financial representative of The Guardian Life Insurance Company of America (Guardian), New York City. He is the creator of The Secure Retirement Method(TM).
