Without proper planning, just 70 percent of businesses will successfully transition to the second generation. And if decisions about something an owner spent a lifetime building are put off, a business could be sold or mismanaged to the point of dissolution — leaving only 10 percent to survive until the third generation.
To ensure your business continues beyond you, and in the way you desire, it’s critical to have a plan, says Jennifer Scroggs, Senior Vice President, Wealth Management Director, Premier Bank.
“No one wants to talk about death and taxes, so paying an experienced expert to talk about it gets pushed to the side when it comes to multigenerational succession planning,” says Scroggs. “But you have to be honest about who can run the business once you step aside. Are you going to leave it to a child? Sell to a trusted employee or partner?”
Whatever you decide, it’s critical to share that decision with everyone impacted.
“Talking about your choice creates the potential for hurt, but there will definitely be hurt if that decision is made later by an attorney or the probate court without your input,” says Scroggs. “Define the succession plan in black and white now so there are no hard feelings or unintended consequences.”
Smart Business spoke with Scroggs about why multigenerational planning is critical for the survival of your business, and why you need to get started now.
What are the benefits of identifying a successor early in the life of the business?
People often think it’s too early, but as soon as you have a home, kids, a business, you should be thinking about this. Otherwise, it just gets bumped down and put off.
Planning early gives the identified successor the opportunity to confirm if they are really interested. If the successor is unaware of the decision, they may accept later out of a sense of obligation but without commitment, negatively impacting the business. In addition, early conversations can bridge the generation gap to a successor who may have new ideas about the direction of the business regarding updates in technology, new ways to service clients, strengthen relationships with clients and form new ones with potential new vendors. It allows you to gain a deeper understanding of each other, making you more confident in your decision — or allowing you to realize you made a bad decision while there is still time to change it.
While it can be difficult to have those open discussions, take pride in the fact that you have chosen an individual who you are confident can successfully run your legacy.
What should an owner consider personally when stepping away?
Life doesn’t end after 40 years of building your business, but owners often don’t think about retiring. You’ve worked so hard to build this business and most don’t know how to move on. How are you going to fill your time? Owners get nervous about idleness and worry about income; these things need to be considered as part of your plan.
It’s really hard to take that first step, to face the reality of mortality and make those decisions without hurting people. However, not making them can divide a family if the plan is not well laid out.
Who can help with generation succession planning?
An attorney should be involved in creating the business entity when it is created, and you should be talking about the next steps then. What would be the impact if you sold the business? If you transferred it to child?
Have that conversation with your attorney every year to secure the continuity of your business and ensure future benefits for your beneficiaries or dependents. The earlier you do that, the more in control you are and the more likely you are to achieve the desired outcome. Tax time is a good time to review the state of the business and your succession planning at a minimum of every five years, but more often if there are major life events.
Get as many advisers involved as possible. An attorney, a CPA, your financial adviser, your banker and other professionals can collaborate for a smooth transition to create the best possible outcome and ensure your planning is effective and the loopholes are closed. If you don’t, it’s not going to look the way you want it to and the people you care about aren’t going to be provided for the way you want. You can pay now to get it right, or someone later will have to pay, likely much more, to resolve the issues.
