Amid the flurry of day-to-day operations, the future plan of a business often is placed on the back burner. But local financial advisers note that nothing can be more important for a company to address than its succession plan. And with the Corporate Executive Board reporting that only about a third of business owners who intend to exit their company in the next five years have a succession plan, advisers stress the time to start preparing is now.
“It’s not uncommon, especially for successful businesses, to be very good at managing the day-to-day growth and issues of their businesses, and not be thinking about the future. But we ask them to think about what that business could look like without the primary business owner there,” explains Guy Hockerman, VP and senior financial planner of The Commerce Trust Company.
A succession plan can smooth the road of transition from the current business owner to the new head of the company. And it will contain the all-important decision of who will be next to lead the business: a family member, a colleague or a third party. “Executives need to evaluate ultimately where they would like the business to go,” Hockerman says. “These succession plans take a fair amount of time to develop, so we suggest that they take at least a five-year period to be thinking about the next steps.”
There are four critical stages of a succession plan: initiation, selection, education and transition, Hockerman continues. “In the initiation phase, possible successors learn about the business. It is important for the business owner to speak openly about the business, in a positive but realistic manner, in order to transmit information about the company’s values, culture and future direction to the next generation.” This step is particularly important for family businesses to avoid future conflict, he adds.
Next, a business owner must select who will be the successor, and that individual should be brought up to speed on operating the company, Hockerman explains. In many cases, there will be education and training for the new leader as the former owner gradually transitions out of the business.
Maurice Quiroga, executive VP and managing director at PNC Wealth Management, agrees that a succession plan is crucial to ensure the continuity of success for the company, its owner, employees and clients. “You never know when a life event might occur,” he notes. “Thirty percent of people will become disabled before the age of retirement; and one in five people will be out of work for at least a year during their career due to an illness or accident.”
Quiroga says the answer to these issues is a succession plan, which will help businesses maximize their value and ensure financial security today and into the future. Among critical components, he says the plan should reflect the company’s goals and designate successors who can afford its acquisition and maintain its success.
Formulating and carrying out a succession plan is a team effort, Quiroga continues. An accountant, banker and attorney can share their expertise with the owner throughout the consideration of a multitude of decisions, including when will be the right time to sell or transfer the company, what will be included in the sale of the business, how the business’ valuation will be determined, and if the prospective new owner will appeal to clients.
Local advisers also note that succession plans should align with the business owner’s estate plans. Businesses should monitor federal estate tax law shifts and evaluate their succession plan from both an estate gift tax perspective and from a company transition perspective, says Richard Kraner, director of the tax and business services department at Stone Carlie.
Ultimately, advisers emphasize the key to a successful succession plan is to start early, develop a formal document, alter it according to company changes through time, and, finally, put the critical steps into action to ensure the business will flourish into the future.