Many businesses fail to stand the test of time because the business owner is unwilling or unable to let go and begin the process of finding a good replacement. The average life expectancy of a family business is 24 years. Only 30 percent of family businesses make it to the second generation and only 10 percent are passed along to the third generation.
1 – GET STARTED
The sooner that you begin the process of finding a suitable replacement for yourself, the sooner you’ll be able to focus on exiting the business on schedule. Most often, procrastination and denial defeat the process. Do estate planning. Have a fully tax-planned estate plan prepared as early in your career as you can afford it. This will help you and your spouse begin to think about succession planning for the business.
2 – DON’T SKIMP ON LIFE INSURANCE
Make sure you have enough. Life insurance can be used to discount estate taxes, fund deferred compensation plans, provide tax-free retirement income and finance business continuation plans on a tax deductible basis. Have a buy-sell agreement. This is absolutely essential for 50/50 partnerships or corporations. In the event of your untimely death or disability, it should provide for someone to take over the business on livable terms.
3 – HAVE A RETIREMENT PLAN
How can you expect to retire if you spend all your annual income or put it back into the business? Pension and profit sharing plans, as well as employee stock ownership plans, all provide attractive vehicles for tax-deferred retirement planning.
4 – KNOW THE VALUE OF YOUR BUSINESS
Most business owners do not know the true market value of their business. Get a meaningful professional appraisal. It’s surprising how frequently the market value varies greatly from an owner’s estimate. Get good advisors. Your accountant, attorney and life insurance agent should be knowledgeable in succession planning. Many are not.
5 – EVALUATE YOURSELF
Any succession plan must fit your personal management style or it will fail. If it’s impossible to evaluate yourself, ask a trusted friend or professional advisor to do it for you.
6 – INVOLVE YOUR SPOUSE
Many older business owners do not share business information with their spouse. However, your widow (or in some cases, widower) will play a major role about the future of the business after you’re gone. In fact, your wife is likely to survive and own the business for 10 years or more following your death. Share the dream. By definition succession planning involves other people. Let them know who they are and what is expected of them. For exit planning to be successful, as the business owner you must share your dream for its future, not only with your professional advisors, but with your family and your business’ key employees.