MoneyTalk Featured

10:01am EDT July 22, 2002

The one mistake many business owners make—after working hard for years to build profitable ventures—is they don’t plan for the next step: What will happen to the business after they retire or pass away?

Succession planning is what keeps a business thriving after the owner steps down. But because it requires emotional thinking, especially a critical assessment of one’s own thoughts, and perhaps the hurting of some feelings along the way, the majority of business owners may put it off or not do it at all. Following are the “how-tos” of successful succession planning.

First, you must understand a business is never too small or too large for succession planning. It’s extremely important for larger businesses simply because of the responsibility to employees. Smaller businesses, at the very least, need to plan for temporary succession in the event that the owner becomes disabled. Succession planning also becomes very important if one or more nonfamily member serves as owner.

During stage one, you must realize you need to relinquish some control. According to Michael Gerber, author of The “E” Myth (“E” standing for entrepreneurial), the key to letting go is delegating. You must realize you cannot continue to do everything yourself. The more you can make your business independent from you, the more easily it will become transferable.

Second, you need to develop a management team and a business structure. This means you have to think about who will be buying the business and running it: family members, key employees or outsiders. When passing on the business to family members, many owners make the mistake of assuming their children want the business. Leaving the business to a child who doesn’t want it is counterproductive to succession planning.

Identifying the management team not only is the hardest part, it will also take the longest time. To achieve the best results, this period usually is no less than five years but sometimes can stretch as long as 10.

Once you start the process of finding a management team, that doesn’t mean the paperwork has to be signed and you lose some or all control. It simply means that systems are created and people are sought to fill the management positions.

Take a serious look at family members and honestly ask yourself who will be capable of running the business. Do the same for key employees. If no suitable person or team is available, identify outsiders who might be capable of running the business. Under the right circumstances, your family may be better off if the right key employee or outsider is found to run the business.

The training process of the new management team then begins. To ensure effective training, you need to involve the new team in more and more of the day-to-day decisions.

The third step is preparing for the sale. When you’re ready to sell, maximize the profitability of your business by eliminating some of your perks (i.e. country club memberships, expensive company vehicles, sports tickets, lavish dining expenditures, etc.) that are paid through the business.

This process should start a minimum of three, but preferably five, years prior to the sale. Why? Many potential buyers want to see the last three to five years’ worth of financial statements and tax returns. This pruning of unnecessary expenditures will increase bottom line profits and result in a better sales price for the business.

The next step is to contact a lawyer and/or accountant/business valuation expert, since sale negotiations can take several months to complete, especially if the buyers are not family members.

Another major task is to create a buy-sell agreement. This is a contract created for the transfer of closely held business interests that identifies how the purchase and sale of one or more of the owners’ interests are to be handled with the remaining owners, including how the sales price will be calculated.

These types of agreements are typically between shareholders of a corporation or between the corporation and each shareholder. They can also be between partners of an unincorporated business as well as a sole proprietor and his employees. Buy-sell agreements require shareholders, partners or owners to offer their controlling interests in the company to those named on the agreement prior to offering it to outsiders. The agreement is usually triggered by events such as death, disability, retirement, divorce or bankruptcy of one of the owners.

After you pass on your business, however, you probably should stay involved to some degree. This becomes important during the transition. If you choose to stay on, you could be involved as an adviser, or if the business is a corporation, sit on the board of directors.

Keep in mind, even if you’re in your 30s or 40s, you should start your succession plan now. At the very least, stage-one planning can begin. The degree of success in succession planning is almost always determined by how early you begin. If succession planning is not tackled at some point, your family may end up paying unnecessary estate taxes or the business may be left without leadership or direction and could eventually collapse.

Lou Stanasolovich is president of Legend Financial Advisors Inc., a North Hills-based SEC-registered investment advisory firm that provides asset management and comprehensive financial planning services on a fee-only basis to individuals and businesses. He can be reached at (412) 635-9210. His Web site is at www.legend-financial.com.