Consider succession planning a priority

When a wise man said “People like change… just not right now,” he could have been talking about changing ownership, especially in a family-owned business.

Setting clear, defined guidelines for a successful succession of ownership – either inside or outside the family – can be valuable going forward. Waiting until a change becomes necessary or is thrust upon you could very well be regrettable.

Who will be the new owner? If it is a son or daughter, niece or nephew; how qualified are they to take over? How much experience do they have and will they be a good fit for future success? How will the sale price be established? Will it be enough for the owner to retire on? If there are siblings, will they share in the profit going forward or sell their share of the company to the new owner? Is it a fair price or is it so high that it will saddle the new ownership with unreasonable debt that threatens the future of the company?

Family relationships have been damaged because of the unintended consequences of poor – or non-existent – succession planning. The businesses can be put at risk because of poor choices and short-sighted financial decisions.

These personal and professional problems can be avoided by thoughtful planning that involves your team of trusted advisers. The team should include respected family members, business associates, attorney, accountant, tax adviser and your banker.

I’ve spent more than 20 years primarily in commercial/business banking and have had a front-row seat to watch succession-planning scenarios play out. The vast majority of my clients have been family-owned businesses – from small, two-or-three person operations to those with hundreds of employees.

A successful succession plan needs to be a “living” document, not one that is created then left on a shelf to gather dust. It should be regularly reviewed and updated every few years to adapt to changing conditions.

The most thought-out succession plans include organized and specific details for a smooth transition from on owner to another. Proper planning and clearly laid out plans allow family members the ability to know what to expect and whether they want to stay with the business or not. For the owner or owners, it creates an exit strategy so they can make plans for the next phase of their lives.

Why do business owners put off such an important piece of planning? For one, succession planning can be uncomfortable. Because the guidelines need to be clear and precise, they can feel cold, distrustful and perhaps even confrontational to members of the family.

Meanwhile, you’ve been in business for years, build your operation day in and day out, constantly trying to make a profit in a competitive marketplace. You are focused on success and growth, not on the transition to come.

For these reasons, succession planning can be a prime target for procrastination. One of those “just not right now” things. That’s the trap – putting it off. The reality is that the sooner succession planning is put into play the guidelines established the better.

Another problem is that there are so many variables. There is no one-size-fits-all succession plan. Every business is different, families are different and people are different. But broadly speaking, there are some key points to consider.

Don’t put it off; start early. Perhaps you can begin by imagining who could take over when you decide to sell or retire. Is there someone in the family? For instance, a son or daughter who works in the business doing small jobs when he or she is young gets to know the business and can figure out if they want to be part of its future. After they complete their education, they might want to work someplace else for a while to gain some perspective before returning to work their way up to ownership.

Working out a methodology for pricing and how the buyout strategy is implemented are important. Is the money for your retirement or is it to be divided among other family members? There are tax ramifications to consider. Then there are such details as how the sale is carried out and how the money is to be paid.

There are many details that will be unique to your business, so it is important to get together with your team of trusted advisers, like your banker, accountant and lawyer, to identify what needs to be done and begin your succession planning. One thing is certain, things will change and the best time to prepare for them is now.