If you were no longer able to run your company, what would happen to it? Have you provided instructions so that your family members, co-owners, managers, and employees know what your wishes are and the tasks that have to be done to keep your business running successfully? Aside from the possibilities of disability or death, have you considered that you may not want to run your business for the rest of your life—that you may want to spend your later years pursuing other interests?

Ninety percent of the millions of businesses in America are family-owned and managed, which makes a solid succession plan essential. An interesting statistic is that only one percent of family-owned businesses in the U.S. reach a third generation with family members still running them. In addition, thirty percent of business owners have not considered a successor, and only sixty-three percent have done so by the time the owner is age sixty-five. In fact, inadequate succession planning may be one of the biggest threats facing the continuation of your business.

The main issue in succession planning is providing sufficient funding, so that the transfer of ownership can be accomplished with as few problems as possible. Insurance, including life insurance, disability insurance, and business insurance, can be helpful in this regard. These provide the money that is necessary to keep your business running without interruption. Your family members, partners, or trusted employees can be beneficiaries, providing the funds for them to purchase the business from other interested parties.

Steve Margulin says, “Having the right kinds of insurance helps in the difficult time of transition. Disability buy-out insurance can fund the purchase of the business specifically in the event of a disability, while having enough life insurance provides money for estate taxes at a time when business is not uppermost in your family’s mind.” Since your death could trigger a huge federal estate-tax bill that could force your family to sell the business in order to have money to pay the taxes, this is an important consideration. Did you know that tax liabilities and estate settlement costs could run as high as fifty percent of your assets?

Think about transferring part of your business ownership to family members using gifting or sale techniques. While it may be challenging to turn over some control of your business, it will shrink your assets and reduce the estate tax liability.

It is important to have your lawyer draft a power of attorney so that property and personal care decisions will be in the hands of a person you know and trust. Another necessity is to have your lawyer draft a business will. Dying without a will (called intestate succession) means that strangers will decide how your assets will be distributed, which is the opposite of what you want. An important part of a business will is a buy-sell agreement, and it is a good idea to get professional help in selecting the structure that will be most effective for it. Be sure, as well, to up-date your will, as changes occur.

A tactic that you may want to consider to ensure the continuation and future success of your business is the conversion of your company to a corporation. Corporate status provides for “perpetual existence” of the business and also limits liability for you and your successor.

What are the steps you can take to insure your business’ success after you have retired or died? Typically, succession planning goes through four stages: deciding on a successor; gradually transferring minority stock holdings; training the successor in all that he or she needs to know to fill your shoes, while at the same time, making plans for your activities in retirement; and, finally, transferring ownership and management responsibilities to the successor, which will go more smoothly if a timetable is decided on ahead of time.

Selecting and training a successor can take months or years. A testing period for your successor is a good idea in order to make sure that both of you are comfortable with the reality of the situation and to determine that it is the best plan for the continuation of the business. Don’t make the mistake of forcing a family member to succeed you, either through overt pressure or guilt-tripping. It won’t be good for either of you or for the business in the long run.

Tell your family and management team what you have planned well ahead of time and review your plans as needed, but at least once a year, to make any changes that may be needed. Remember that changes in your personal life may impact your business; take them into account.

Discussing business succession with your family or possible successor does bring up issues that may be unpleasant to think about, like aging, loss of control of your business and financial affairs, and death. However, if one of your life goals is to transfer a viable business to your offspring or trusted business partner or employee, then you have to talk about it.

Through careful succession planning, the cost and difficulties can be minimized, and the transfer of ownership and control can be assured. Your business can continue to flourish and provide for your family long after you can no longer do so.

As this is a specialized area, Steve brings in experts to work with you on specifics.

For more information on succession planning, see these websites:
http://www.arne-co.com
http://pcps.aicpa.org/Resources/Succession+Planning/Succession+Practice+Continuation+Planning/