Succession Planning: The Key to Business Survival

It takes a special kind of person to turn a dream into a successful new business venture. To be one’s own boss and succeed as an entrepreneur is, for some, part of the American dream.

In this country, nearly 90 percent of all businesses go their start as family-owned enterprises. According to the September-October 1999 issue of Personal Finance Planning, as many as 20 million American businesses have come to rely on the pioneering vision of their owner to keep their families and employees prospering.

That dream can be short-lived if careful thought is not given to choosing a successor for the owner of the business. The business survival rate will diminish considerably if left to chance. All businesses, regardless of size or structure, should address the issues of succession planning.

Looking ahead to your own retirement, disability or death is not the kind of thinking that comes easily, but ignoring these possibilities could be a costly mistake. The average family-owned business lasts just 24 years, and fewer than 20 percent of these businesses survive to a third generation (Personal Finance Planning, September-October 1999). As owner, you also should give consideration to your successor as your role changes with the growth of the company. These role changes typically occur years prior to a retirement, disability or death, and this planning should not be overlooked.

PREPARE FOR TRANSITION. There are specific steps you should consider and implement if you want your business to survive. As a business owner, you should develop an exit strategy and do some long-range financial planning for the day you turn the business over to others. The earlier that financial planning begins the better. More cost-effective options are available to owners in their thirties and forties than to those in their fifties and sixties. It is never too late to plan; however, the cost associated with later planning will be relative to your age and insurability.

The owner should step back from the emotions that often bind families and consider strategies that address the issues regarding succession from the viewpoints of everyone involved. Family disharmony can be the ruin of successful planning. Treating all family members fairly can be accomplished, but that does not mean that all family members have to be part of the business. Do not overlook the options available for those family members who chose not to be a part of the business. Also recognize that your vision and that of your successors might be very different. Deal with the issues openly and honestly, for to ignore them could be costly. You can eliminate the sources of potential conflict and still give the business the liquidity it needs to survive a transition in leadership.

The main issue in succession planning is to provide adequate funding when ownership of the business is transferred, so that it is accomplished with minimal difficulty. Life insurance, individual disability insurance and overhead disability insurance are key planning tools. These products provide the dollars needed to keep your business running smoothly. They also provide a fair share of the company’s worth to all involved with minimal conflicts. Your key employees, partners or even a knowledgeable competitor can be the beneficiaries of these policies, assuring that they will have the funds to purchase the business entity from the remaining interested parties and continue the business when you either retire or die.

Keep in mind that any financial planning for the business will have a direct affect on your estate. Careful consideration should be given to the estate and gift taxes associated with transferring your business interest to family members. Your financial professional should be instrumental in defining these pitfalls and helping minimize the possible transfer headaches. He or she should be aware of all the pieces that can help design the most effective method for passing on your business. Do not fall into the traps that jeopardize too many family-owned businesses – the failure to properly prepare for a transition in ownership or a lack of adequate funding available to complete your financial goals.

The author is a financial representative with Northwestern Mutual Financial Netword in McLean, Va.