It’s hard for most entrepreneurs to imagine life without the company they’ve founded, the product of years, even decades of hard work and sacrifice. Yet today, when more than half of small business owners are over the age of 50, according to a new study by Babson College, it’s more important than ever to have a succession plan in place.
Succession planning can help you increase the odds of passing your business along to your loved ones, a challenge for many entrepreneurs. A Family Firm Institute survey found that while 88% of current family business owners believe the same family or families will control their business in five years, only about 30% of family businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.
Just as important, a solid plan for the future can help your employees stay more engaged and productive right now; in fact, a survey by the succession planning technology firm Software Advice found that 94% of employers said that having a succession plan positively impacted their employees’ engagement levels.
Not sure how to get started? A good succession plan should answer five important questions:
Who will take over?
You’ll need to start thinking about your eventual successor years before you retire. Evaluating internal candidates, recruiting outside talent, and remedying gaps in experience with additional training can take up to a decade. Even if you know who will succeed you — whether it’s one of your children or a trusted employee — you will need time to bring them up to speed and make sure that clients, vendors, and other employees are comfortable with their leadership. So, start early and bring in as much expertise as you can from colleagues, family members, and even outside consultants. An open, inclusive process will give you additional perspectives on your choice and help you build buy-in for your successor.
What happens to everyone else?
Choosing a successor inevitably means not choosing multiple other candidates, whether they are family members or valued members of your company’s team. Work with your financial advisor and estate planning team to ensure that all family members are taken care of fairly, whether they work in the business or not. Meet with your key employees to clarify their roles post-transition and reinforce their value to you and the company.
How will the transition be funded?
In many cases, the next generation of owners don’t have the liquid assets to buy a company outright, so you’ll need to develop a financing strategy to ensure that you and your family receive compensation. In some cases, this can involve a cash infusion from an outside investor like a private equity fund. In other cases, buy/sell agreements can be funded with life insurance. Talk to your financial advisor, your attorney, and your tax professional about the method that will work best for your company.
What will your role be afterwards?
Some business owners continue to participate in their company after they’ve sold all or part of it, taking a seat on the board, for instance, or acting as a consultant. Others prefer a clean break, so that they can pursue other interests or even start a new company. Make sure that you and your successor agree about how much and what kind of involvement you’ll have, post-transition, to reduce the potential for conflict and frustration.
How will your heirs cover estate taxes?
A new higher estate tax exemption means that businesses valued at up to $11 million (and $22 million if you are married and file jointly) are exempt from estate taxes. If your business is worth more than that, you’ll have to plan to make sure that your heirs can pay estate tax without forcing a sale of the company. Life insurance trusts are one way to cover this expense, since death benefits are not subject to estate tax and not tied up by probate. Talk to your financial and estate planning team for more information.
These questions are, obviously, just a starting point for your succession planning process. Your plan should reflect the unique specific characteristics of your family, your business, and your own constraints and objectives.