Succession planning can be a difficult task for business owners whose sole focus has always been the growth of the company, says Steven P. Larson, an attorney with McCarthy, Lebit, Crystal & Liffman. However, taking steps to secure your company’s future is the best way to protect yourself, your family and your employees following your departure.
“Every business transition strategy, even within the same industry, is going to follow a different path,” Larson says.
“Every approach is unique because it is based on what you want to accomplish and the legacy you wish to leave behind. There are always options, but the sooner you develop a plan, the more choices you will have. Ultimately, your efforts will provide a great deal of relief and guidance to your family and your employees, knowing that there is a plan in place.”
Smart Business spoke with Larson about how to initiate the succession planning process and the importance of starting early.
Where is a good place to begin your succession planning?
There are two primary areas of focus. The first step is to review your basic estate plan, which should include your will, revocable trust, financial power of attorney, health care power of attorney and living will.
These documents provide baseline protection to ensure that upon your death or incapacitation, a trusted individual is ready to step in and manage your affairs. Along those lines, it’s a good time to consider what protective measures you have in place, such as life insurance and disability insurance to cover you in the event of death or incapacity.
The other area of focus is to develop your ideal business succession plan. Here, the options are vast and highly customizable. While some business owners choose to transfer control of the business to a family member, others may elect to remain with the company in a reduced capacity.
Further options include selling the company to a third party or arranging for a management buy-out, either immediately or over a period of time. Typically, this is a lengthy process that can take years to fully develop and implement from beginning to end. It is never too early to begin thinking about the future of your business and what you want your legacy to be.
How does insurance tie in with both estate planning and business succession planning?
Insurance is important for any business owner, but it becomes particularly significant if you own a business that is highly dependent on your presence to succeed or a service business, such as an architectural firm, law firm or medical practice.
These types of businesses cannot function without you. Thus, you need to formulate a plan that clearly spells out what should take place in the event that you are unable to continue due to your incapacity or death. If you wait until this worst-case scenario occurs, it will be too late to get the insurance coverage needed to protect your business and any stakeholders.
Life insurance is utilized frequently during the estate planning process, particularly for business owners. It may be used to fund a buy-sell agreement, pay estate taxes or provide liquidity to your family.
How prepared are most business owners to deal with succession planning?
It’s one area of the business that is often put off for another day.
Succession planning involves asking and answering difficult questions, including when you should step away, if there is someone in the family or business who has what it takes to lead the company, if you have the time to transfer your knowledge to that person, and ultimately, what is your legacy.
Often business owners have a general idea of what they envision the transition looking like, but it takes work to craft the final version of their succession plan.
Business owners, especially those who built the company from scratch, have a deep knowledge of their business. They also recognize the value of the company, but they may not know what it takes to monetize that worth.
It can be eye-opening to go through a business valuation and determine what needs to be accomplished in order to find the right buyer, if that’s the chosen path. It is important to engage the right team of advisers and give yourself time to complete the process to ensure you achieve your end goals. ●
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