Most business owners want to grow their business and maybe even pass it on to the next generation. But how many owners actually succeed? Relatively few, as it turns out. Studies show only a third of family firms make it to second generation and just a sliver get passed onto the third generation.* A key reason for this is that many companies lack proper succession plans.
Consider the situation your family, employees and company would be in if something unexpected were to happen to you. What would happen to your business? Would it stay in the family? Could it realistically stay solvent without you at the helm? Or would it be sold? And then there's the million-dollar question: Do you even know what your business is worth? The answers to these questions may not be as straightforward as you imagined.
That's why you should start planning now even if you don't intend on leaving the business for years to come. So what options are available? If and when you exit your business, there are four possible successors: family members, co-owners, key employees or an outside third party.
That brings us to a succession action plan and exactly what that entails. First, select your successor(s); it may require careful analysis. Next, determine your business valuation; bear in mind when a business is sold to family members, the transaction draws extra scrutiny from the IRS. Lastly, develop a plan to transfer your business interest quickly to minimize operational disruptions.
Once you identify your successor(s), you must make sure that the individual(s) are in a position to take over the company --and ensure a smooth transition by outlining the terms of succession in advance. A buy-sell agreement will work differently depending on the type of business entity and the number of owners. Each type of agreement helps create a smooth process for transferring ownership of the business. The buyer can purchase a life insurance policy to help make sure they have available funds to purchase the business when the time comes. Additionally, a buy-sell agreement helps show creditors and customers that your business is more sustainable because you are taking action to mitigate risk.
While each business is unique, succession planning is something that all businesses should consider.
* Source: Molly, V., Laveren, E., and Deloof, M. (2010) Family Business Succession and Its Impact on Financial Structure and Performance. Family Business Review, Vol 23 (2) 131-147