The Importance of Business Succession Planning

All too often business owners are so focused on running their business that they fail to plan for its succession, or their own estate plan which inevitably has an impact on the succession of the business.  According to Bloomberg & PricewaterhouseCooper, 8 out of 10 business fail within the first 18 months and 70% of businesses never make it past the first generation. Interestingly, a commonality among the majority of the businesses that succeed – a written business plan that includes succession planning.

So what types of questions arise in the course of business succession planning? What can you start thinking about today?

First, you should consider who you would like to take over your business after you. This may be your children or it may be employees or managers within your business. You also might want to sale the business outright.

Common mistakes that are made when considering who should get the business is whether your children are even interested, or equally interested, in running the business and whether joint owner’s spouses or children will work well with the current or future owners. Life insurance policies often can be purchased to provide equality among children (one gets the business, the other the life insurance proceeds) or to buy out uninterested or undesirable heirs when one partner becomes incapacitated or dies.

Next, you should consider how you want to transfer the business.

You can sell the business outright. This can be done through selling the interest to children, employees or others. This may be a good option for those who need income from the business to use in retirement.

You can use a buy-sell agreement.   These agreements are ideal for entities with multiple owners or for those who have selected the person(s) they would like to transfer the business to. In a buy-sell agreement, a business owner can use triggering events, like retirement, incapacity and death, to begin a process for the designated successor to purchase his or her interest in the business.

You can transfer the ownership through a trust.   A revocable living trust is a great estate planning tool to assist with business succession. The business owner first transfer the business to the trust, then name’s the intended successor(s) within the trust. Prior to the business owner’s death, he or she serves as trustee and beneficiary and continues to run the business as normal.

Finally, your business succession plan needs to work in conjunction with your own personal estate plan. If the goals and objectives of these two plans do not align, your planning efforts in both areas may fail, or at least not work as intended.

The most important thing you can do for your business is to make a plan.  Delaying is the first and most common succession planning mistake.  To have a succession plan that works for your business, and family, it is important to create a plan early, then lay the groundwork to implement the plan, which often takes several years and consultations with a variety of professional advisors from business attorneys, insurance brokers and financial and tax advisors. For more information, contact us today at 720-248-7621 or  Karen@HolmesShirleyLaw.com