Virtually all business owners have in the back of their minds that some day–perhaps far in the future–they will be able to walk away from the business with all of the financial security they need.
Most realize that that financial security will be derived from the successful operation of the business. Yet few devote the time or energy to develop a plan for transferring the business to the right people, under the right terms, at the right time and for the right price.
The process of developing the plan is called business succession planning and it is one of the most widely discussed topics among financial professionals today. In my experience, however, it is also vastly underutilized by closely held businesses.
Why? I believe it is because business succession planning is one of the most perplexing, difficult issues that business owners face. Avoiding the issue is more comfortable than facing it, but the consequence of inaction places financial security goals at risk.
A good business succession plan must begin with the end in mind. What is the goal of the succession plan? To create a market for closely held stock? To provide the next generation with a successful enterprise? To enable employees to carry on the business they helped build?
The goal should determine the succession plan. For example, if the goal is to guarantee a market for the business owner’s stock or to transfer a business interest to employees, a buy-sell agreement will probably be in order.
If the objective is to put stock in the hands of children, then a buy-sell agreement might not be appropriate. Certain issues are common to all succession plans and include:
Control. Who is to control the business enterprise and when? If the goal is to create a market for the business interest at death, disability, retirement or other termination of employment, then control should change at the time of the triggering event.
If the goal is to transfer ownership to children, then gifting small amounts of stock while the business owner is still involved in the business seems to work well for all concerned. As children become more involved in the business, the owner can see how the next generation handles the responsibilities of ownership; employees can glimpse the future when the patriarch retires and the children take over.