Does your company have an effective plan for executive succession? Do you have a plan for current employees to step into key positions? Do you have an objective process to identify and develop future leadership? These issues alone point out the need for succession planning.
According to the U.S. Small Business Administration, only 30 percent of family-run companies succeed into the second generation, while only 15 percent survive to the third generation. A key reason, according to many experts is the lack of an orderly succession plan. Creating a succession plan can help ensure that your company will continue into the next generation and beyond.
“A succession plan is a tool to help a business to be prepared for the transition of management and ownership,” says Jeff Hipshman, partner, HMWC CPAs & Business Advisors in Tustin. “Succession planning not only helps ensure the ongoing prosperity of your business but also protects family members and reduces turmoil in the event of unexpected circumstances.”
Smart Business spoke with Hipshman about several key aspects of succession planning.
What should a succession plan include?
For maximum effectiveness, your plan should address a number of issues, including management, ownership, legal concerns, expansion plans, product development, finances and taxes. The plan should reflect both the needs of your business as well as your personal interests and goals. To ensure a continuity of business goals and strategies, consider which aspects of the plan should be prepared in conjunction with your successor(s).
This process may point out the need for an appropriately structured buy/sell agreement. Buy/sell agreements protect the business, the business owners and their families if one of them can no longer work. Without a buy/sell agreement, an owner’s family would own his or her share of the business if he or she passed away. They could participate in the profits without contributing to them. A buy/sell agreement solves that problem as well as other issues. Work with your CPA and attorney to develop a buy-sell agreement.
When should the plan be prepared?
It is typically best to begin creating your succession plan while you are healthy and fully involved in running your company, perhaps no later than your mid-50s to early 60s. However, starting at an earlier age will allow time to further prepare your children or others for leadership transition.
How should a successor be chosen?
One of the toughest decisions to make when creating a succession plan is whether you’ll give ownership to your children or sell the business. Be sure that your successor possesses the appropriate education, skills, professional experience and management abilities necessary to preserve and grow your business. Key characteristics to look for in a potential successor include motivational and conflict resolution skills and the ability to communicate ideas, as well as a vision for the company that’s in line with yours. Keep in mind that, as your business evolves, your successor may need a different set of skills than you possess.
What about sell versus transfer issues?
If your children will take over, you need to decide whether you’ll transfer your ownership interests during your life or at death and plan for any gift or estate tax liability, which could be sizable. If you choose to sell, you can sell to an outsider or to employees. If you choose the latter, you may want to consider setting up an employee stock ownership plan.
Once you’ve decided who will own your business, your plan should detail how the ownership transfer will take place. For instance, how will the successor purchase company assets or stock? In some cases, insurance policies provide funding for the purchase. The succession plan should include a timeline of when company property or management tasks will be transferred to your successor. Your retirement income could be significantly impacted by these decisions.
What should your role be after succession?
The answer to this question is personal and varies with every owner. Consider how involved you wish to be with your business as you age. There are numerous issues to address, a few of which include: Do you want to work full-time or in a part-time capacity? At what age do you want to retire? Do you want to be involved in day-to-day business issues after stepping down as leader, or just strategic matters? Where do you want to live after retirement? Will you be relocating away from the business?
Jeff Hipshman is a partner at HMWC CPAs & Business Advisors (www.hmwccpa.com), one of Orange County’s largest local accounting firms. Contact him at (714) 505-9000 to discuss how your company or client could benefit from HMWC’s services.