Most business owners pride themselves on their ability to see into the future and get out in front of potential problems. How would they have survived otherwise? But when it comes to anticipating their own futures and their inevitable departure from the scene, most are anything but forward thinking. According to one survey, a paltry 32% of business owners with $500,000 or more in assets have a formal business succession plan. As one poll put it, most would rather choose getting a root canal over trying to sort out the details of how to pass on the fruits of their life’s work.
The reasons are obvious. First, most successful people do not want to dwell on their own eventual decline, retirement, or worse, demise. Secondly, the whole prospect often raises a range of touchy subjects that can affect present-day relationships with partners, spouses, children, and other stakeholders, all of whom no doubt have their own very clear view of how to dispose of one’s business assets. Dealing with tough issues, however, is the stock and trade of most successful business people, and it’s important for them to see succession planning as just one more tough issue that needs attention.
To get out in front of this particular problem there are a few things you as a business owner need to do:
- Accept that it needs to be done. And sooner rather than later. A good succession plan may need to be phased in over time and should be able to evolve with changing conditions. It is not something to be done in a hurried fashion or at the last minute.
- Define your goals. Develop a clear-eyed vision of what your personal needs and desires are, e.g. retirement, sale to partners, passing on the business to family members, creation of a trust, selling out to the highest bidder, etc. According to a CNBC survey, 78 percent of small-business owners plan to fund their retirement out of the sale of their business. A future sale may be to partners or to outside entities, but having a fix on who, as well as when and how is important.
- Determine the value of your business. Knowing the worth of your enterprise and its various components, including both tangibles such as fixed assets and earnings, and intangibles such as brand value, location, customer base, human capital, growth potential and vendor relationships, is an essential step in planning for its eventual transfer or liquidation. To ensure an objective judgment, this should be done in consultation with a reputable accounting firm or CPA.
- Assess Risk Factors and Tax Consequence. The advice of a reliable tax expert should also be an integral part of any succession planning process, which is another reason for starting early. Understanding these and other possible negative aspects of a future transfer will help you structure all of your business plans accordingly.
- Plan for the Unplanned. Not knowing what’s coming is a fact of both economic and mortal life, so it is vital that you have a Plan B in the mix so that if health or financial issues arise that could impede the progress of your by now well-honed succession plan, you and/or your heirs will still be able to reap the rewards of your hard work.
I’ve worked with many business owners over the years, and succession planning is by far one of the most difficult and avoided issues. It takes time, a lot of patience and most often includes family which adds an entirely different dimension to the process.
Take it slow, hire a professional to work through it with you and think of it as retirement, not a root canal. I promise, it will be worth it in the end!
Dave Sinclair, CEO The WorkPlace Solution