The primary reason many business owners do not get involved in succession planning can be summed up in one word, according to Hilliard Lyons financial consultant John R. Stewart: control.
“Some business owners simply do not want to give up control of their companies,” he says. “Psychologically, failing to plan for succession gives them the feeling they are still and always will be in control.” Ironically, Stewart notes, “Succession planning actually gives them more control, since they no longer have to worry about who will manage the business once they are gone.”
Smart Business spoke with Stewart about the need for succession planning by business owners, how to go about it, and who it benefits.
Why should business owners worry about succession planning?
For one thing, establishing and growing a business especially a family business is often one of an owner’s proudest achievements. For another, when a small business is a key component of family wealth, the owner usually has a strong desire to perpetuate it in one form or another. That is why succession planning and the selection of qualified planning professionals are so important.
What are business owners really transferring when they plan for succession?
A typical business plan has two elements that owners should consider separately: the transfer of power and the transfer of assets. The former involves transferring control of the business’s operation to the people best suited to exercising it. That is an art. The transfer of assets, on the other hand, is a science. The wealth concentrated in the business is transferred to designated people who may comprise a different or larger group than the person or persons who will be assuming power.
How should a business owner select a succession planner?
Carefully. One of the hardest tasks a business owner does is provide for an orderly succession in perpetuating the company. Succession is particularly difficult in a family business. So a business owner should select a team that is objective to construct a succession plan that works best for family members, employees and the owner.
Who should be included on that team?
Ideally, the team should include a CPA, an attorney, a specialist in business evaluation, and a coordinator, such as a Chartered Wealth Advisor. It makes more sense to let one person coordinate the process rather than hire each specialist individually. Third-party coordinators can offer a range of strategies and deal with the psychological and emotional issues that often affect succession planning.
It is recommended that business owners interview prospective coordinators before choosing the one that best fits their individual needs. Some financial advisers offer free consultations to prospective clients so they can get to know one another.
Is there a rule of thumb regarding when a business owner should start succession planning?
Conceivably, it can start from the first day. But the ideal age is around 40. That gives the owner time to assess the success and direction of the business, and allows for changes that arise as the business grows.
Some people wait too long. Once an owner reaches age 60, for example, it might be too late for successful succession planning. The key is to start thinking about an exit strategy as early as possible in order to consult with professionals, put a plan in place, follow up continually to adapt to inevitable changes, and provide for and optimize chances of getting the most financial and personal satisfaction from the results.
Succession planning is a process, not an event. The process requires planning, teamwork and constant re-evaluation. If it is not done by process, it will be done by crisis, which is nothing more than a failure to plan. That can lead to disastrous results another reason for timely succession planning.
Is there one exit option that is better than others when deciding to cede control of a business?
Not really. One of the purposes of succession planning is to identify the exit strategy that best fits a specific business’s needs. Owners who do not plan for succession lose their options.
There are several options available to business owners who plan carefully. They can pass the business on to their children, other family members or employees; sell it as a going concern; liquidate it and sell the assets; or file for bankruptcy (if all else fails and the business has substantial debts). Which option depends on individual owners’ circumstances and preferences.
JOHN STEWART, a Chartered Wealth Advisor, is the Dublin branch office manager for J.J.B. Hilliard, W.L. Lyons Inc. Reach him at (614) 210-6285 or firstname.lastname@example.org.