Why Every Business Owner Needs a Succession Plan
If you own a business, it inevitably will be passed along to someone else in the future. Here’s why it’s important to plan ahead for the transition.
There are 5.5 million family businesses in the United States, employing 63 percent of the workforce . All of those businesses will one day be in the hands of someone else – regardless of whether the business owner plans for his or her transition.
“Business succession is inevitable,” says Joe Fahey, CFA, national director of business succession planning at PNC. “It may happen by design (well planned) or by default (no plan) in the event of death or disability. The consequences of not planning ahead can be catastrophic. The benefits of thoughtful planning are beautiful and rewarding”.
Fahey, who leads a team at PNC that works with business owners deciding if and when to transition, answered some common questions about business succession planning.
Q: What is business succession planning?
Fahey: Business succession planning is the process of evaluating the pros, cons and financial implications of whether to keep or sell a business. A business succession plan is designed to help a business owner obtain the knowledge and control they need to determine the best option for their business, themselves, their families and their communities.
Generally, business owners create a succession plan so they can have financial security after they leave the business and to avoid conflict and discord among family members.
For the owner, they can enjoy an efficient, seamless and harmonious transition. An effective business succession plan allows the business and the employees a great opportunity to continue its success.
Q: When should a business owner start planning for his or her transition?
Fahey: Every business owner should create a succession plan as soon as possible. It doesn’t matter what stage of a business lifecycle you’re in, you have to plan for the unexpected. In the unlikely event of disability or death, you want to make sure your family and business are protected.
As a business owner, you also want to make sure you are informed about what your business is worth. That number can fluctuate over time. If you create a business succession plan and regularly evaluate it, you can help your business grow and evolve – or sell at the opportune time – to meet your future personal financial objectives.
A succession plan is especially critical for business owners in their mid-50s and older while there is time to fully develop the plan to maturity. That generation will face a choice in the next few years whether to keep or sell the business --so early and diligent planning will help identify the opportune timing.
Q: What should business owners think about when developing a business succession plan?
Fahey: From my perspective, it ultimately boils down to how you answer five key questions:
- How should I transition my business?
- When should I transition my business?
- What is my business worth?
- Who should benefit from the transition of my business?
- How should I design, implement and communicate my plan to my family?
Q: What are the common mistakes business owners make when creating their business succession plan?
Fahey: The biggest mistake business owners make is trying to create a succession plan without the help of a professional advisor or team of advisors. There are a whole host of factors at play, and one mistake can jeopardize your future and that of your business. My colleagues and I have seen the mistakes made by other business owners who didn’t adequately plan, and we can help others avoid the same errors. To help make the right choices, assemble a team of experienced specialists who can provide objective advice and help you integrate your business and personal financial planning.
Regardless of whether you decide to keep or sell, you need a financial snapshot to compare cash flow, liquidity, diversification, and risk profile. One of the biggest mistakes or surprises is the drop in cash flow, post-sale, is not nearly as high as they were expecting. If you have that information before you sell the business, you can be prepared to make a more informed, and possibly a different, decision.
Another big mistake is not factoring in taxes, especially estate taxes. If your largest asset is your business, estate taxes can be a “hidden liability” that could derail the business, your family’s financial future and possibly force a sale of the business, often at the worst time of the business cycle.
Q: Does business succession planning only benefit the business owner?
Fahey: Actually, no. The primary beneficiaries are family, charities and employees (not the IRS). Business succession planning will help the senior generation business owner have financial peace of mind in controlling who benefits from their lifetime of hard work and good fortune. A lot of the business owners I work with are not only concerned about their financial future, but they want to make sure their children and grandchildren benefit from the sale of the business, as well.
By planning ahead, you can redirect money that would otherwise go to the IRS to your family members and charitable organizations.
A solid succession plan also can incorporate helping your employees or addressing your philanthropic aspirations, so non-family beneficiaries also can benefit from the transition of the business.
Learn more about how PNC can help you develop a business succession plan »
Joe Fahey is director of business succession planning at PNC.
As they say, life isn’t a dress rehearsal, and therefore it’s critical to plan for your and your business’ future. A business succession plan will help you understand how your company competes in the marketplace, what it’s worth and how to meet shareholder objectives.
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