Putting the “Success” in Succession Planning

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December 10, 2013

Succession planning may be one of the most important strategies for maintaining the longevity of a business, yet a recent LegalZoom survey shows only one in four small business owners has a plan in place.


That can spell disaster for the next generation. “Owners of businesses of all sizes have an idea in their heads about how succession will go, but they don’t make it formal,” says David W. Burleigh, Partner at Buechner, Haffner, Meyers & Koenig Co., L.P.A. law firm in Cincinnati. Then when the need to transition arises, there’s no plan — which could lead to confusion, fights among potential successors and lost business.


“Putting a succession plan in writing gives clarity to everyone,” Burleigh says.


During the following stages of your business’ growth, consider evaluating or modifying your succession plan to ensure that it is consistent with your vision for the business’ future. 


1.  The business is up and running.

The timing is different for every business, but once your company has value associated with it, including steady income, as well as customers and employees, then it is time to consider creating a succession plan. “Make sure your will and trusts are updated to define who will run the business and who will inherit it after you are gone,” says Scott Mahon, Managing Director of Wealth Strategy for Ascent Private Capital Management of U.S. Bank. “No matter how old you are, it’s valuable to have a contingency plan laid out for the worst-case scenario.”

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December 10, 2013

2. More than one person owns the business.

With multiple business owners, the death or retirement of one owner could result in a huge loss for everyone. To potentially minimize the impact, you could put in place buy/sell agreements. Such agreements lay out the value of each owner’s piece of the company, co-owners’ rights to buy out shares if one owner leaves or dies, and how they will pay for that transaction. These agreements are often defined with a life insurance policy, Mahon says.


3. Your company reaches a level of maturity.

As the value of your business increases, think about whether someone in the next generation has the skills to run the business — and if not, whether you want to train an existing employee or hire someone new for the transition and give them the opportunity to gradually take over the company, Burleigh says.

“This person should have strong leadership skills and an intimate knowledge of how the business operates, and should have built relationships with key clients,” Mahon adds. “In my opinion, the worst thing you can do is to have an owner who makes all of the decisions. Because when they are gone, the people left in charge won’t have any experience running the business.”


4. The company keeps growing.

If your company’s size or revenue increases dramatically or expands into new markets, ensure the succession plan is relevant and expansive enough. Look beyond your individual replacement and think about the management bench strength. “If something happens to you, you want successors in place who are well versed in how the different business units run and who will have direct responsibility for making decisions,” Mahon says. Both owners and employees might be a part of this plan.

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December 10, 2013

5. You want to sell.

If the plan involves selling your company to a new owner, define your exit strategy three to five years prior to retirement. Mahon suggests involving an independent third party, such as an investment banker, to appraise the value of the business and help identify potential buyers, including competitors or private equity firms. Your Wealth Management Advisor can help introduce you to resources that you may find helpful. “Keep an eye on similar companies selling in your industry to get a sense of the market,” he says.


6. You’re close to retirement.

As you prepare to retire, think about your own finances. “A lot of owners make

the mistake of tying up all of their net worth in the business,” Mahon says. To achieve liquidity for retirement and reduce the risk of losing everything if the business fails, consider building a liquid nest egg outside of the business, including regularly funding qualified retirement accounts.


As part of this phase, define specific terms for the financial transition, ensuring these terms accommodate your financial needs. For example, the acquirers might provide a lump sum payment upon transition, monthly payments over a set number of years or a combination of the two. Your Wealth Management Advisor can help you define these parameters. “Whether you sell the business to a child or a stranger, you want to be sure the deal will provide you with the necessary cash flow for retirement,” Mahon says.


Please see important information below. 

Wealth Transfer