As an increasing number of business owners and CEOs reach retirement age, many family-owned and closely- held businesses are struggling with succession planning. Owners and executives are faced with identifying the next generation of leaders and determining if they can pass the company on to family members or employees. Many owners explore options for selling their companies and want to make sure they get the most value for their hard work and investment. Here are some suggestions for preparing for the expected and the unexpected.
Ideally, the time to think about succession planning is the day you start your business. As you factor in your long- term goals for the business, something as basic as the type of entity you form can have significant implications to how your company is positioned for sale or succession. You should carefully review your entity structure based on both short-term and long-term goals.
You also want to be strategic about the management structure you create and the people you hire. Are you training your team to run the company if something were to happen to the owner or CEO? If you have allowed operations to rely on a single person or only a few individuals, all the planning in the world won’t matter.
Communicate often with your service providers.
Since life changes quickly, a succession plan should be a living document that evolves as conditions change. For more than seven years, I worked with an owner who ran his company with his two sons, and they had a strong, successful business. Even though he was active and had no health issues, I often encouraged him to set up a succession plan.
After he agreed, we coordinated with his attorneys and insurance providers on the valuation of the company, payouts and coverage on insurance policies, planning for estate and trust issues, tax implications for family and continuity plans for the business.
Within a year of completing this plan, I received the sad news of the owner’s unexpected passing. Due to good planning and clear agreements, the family had the money it needed to be cared for and the company had the resources to continue operations. Since they had also built a strong management team, the business was able to continue with great success.
Be willing to ask the tough questions.
Unfortunately, many of the circumstances related to succession planning for closely-held companies often involve sensitive topics like death, disability, money, relationships and ownership. These are tough topics to talk about, whether it’s a family business or any type of closely-held business. Without a clear plan, feelings will get hurt. Owners and service providers need to be willing to ask the tough questions and get resolution before there is an issue.
As a business owner, you work hard to build value for your family and business. But you should regularly ask yourself, “If something critical happens – am I prepared?” Good succession planning allows your company to not just continue, but to potentially thrive.
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