By John McEnery, Board of Directors

A successful succession plan requires time and strategizing

Whether planning to pass on a family-owned small business to your children, or to a valued leader at your firm, or just sell the company, you need to have a corporate estate plan in writing upon the conception of your company—and ideally five to six years in advance.

To let it slide leaves you vulnerable, as are 92 percent of companies which fail to have in place a “comprehensive development program,” reports the American Management Association. About a quarter of companies have no succession preparation at all.

Here are ten reasons for having a preplanned exit strategy:

1. Wait too long and you or your family might have an unexpected death or catastrophic illness that would spike the cost of life insurance compared to a policy purchased when the principals are healthy.
2. The more in advance you buy policies, the lower the premiums may be. The cash value of life insurance builds with time, so by year five (or higher), you’ll have significantly greater value.
3. Thus, you may be more able to afford life insurance policies not only for owners but also for the firm itself. Or you can use the proceeds to pay a departing owner an impressive annual stipend without overburdening the company. You also might financially reward key personnel to ensure they’ll remain with the company.
4. A transfer of power is complex enough without you or your heirs being emotionally raw or financially insolvent. Plan carefully to resolve any pitfalls that might lead to family discord, or worse, litigation.
5. Amassing assets may take years, especially should you hope to fund a twenty-year or longer fret-free retirement.
6. You can arrange any sale or transition to occur at the best moment for you, when your income is liquid and you have time to determine the value of customer lists and other intangibles.
7. A trusted transition team can be in place, including not only your in-house leaders and family members but also attorneys to arrange a smooth buy/sell and/or passing of the baton; a tax accountant with knowledge of local, state, and federal taxes to maximize tax shelters or laws, or set up stock-purchase plans where key employees become owners; investment bankers who can wisely accumulate adequate funds; and an insurance broker to target the best life insurance policies and to arrange a non-qualified pension plan that enables you to pass the company to new owners without debts.
8. It’s far easier to enact and enforce a buy/sell agreement that was set in motion when the company was launched. You can plan for potentially difficult contingencies, such as unexpected deaths or an owner’s wish to retire or divest. Surviving partners and investors may not want the deceased owner’s spouse to have partial control of the business. And the widow or widower might not be willing to helm the business.
9. Some family members may be interested in, and capable of, continuing the business. Others may not. It’s complicated enough to be fair and satisfy the changing wishes of family members without imposing a deadline, such as your retirement.
10. Once you have a succession plan, it’s far easier to update it as life events change the equation. These may include major product developments, or family events such as births, marriages, divorces, or deaths. Prenuptials can include—or exclude—a new family member.

Disclaimer: These views are intended to provide an overview of succession issues. This article is intended to be for educational purposes only. Seek your own legal, accounting, and insurance advice before forming a succession plan.

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