While advisors don’t have a good record of addressing succession planning in their own firms, it’s sometimes easier to address the difficult questions surrounding the future of someone else’s business when they’re not around to run it anymore.
Key to that is getting people to think about what will happen to their business if they die or become disabled. “The first thing a business person needs to think about when they start a business is what happens if something happens to them, whether that’s death or disability. Generally it’s not going to be retirement,” Bruce Hoffmeister, senior wealth strategist at Wilmington Trust, told ThinkAdvisor. “It’s a starting point for thinking about ‘If I’m not here, how is this business going to continue?’”
Clients who launched a business without a partner have some different concerns than those who did it as part of a team, Hoffmeister said. “If you have a partner, you have somebody else who you presume is going to step in to fill your shoes, assuming they’re not a silent partner. With a sole proprietor, you have different issues and if you’re a startup company, generally you’re looking at a small number of employees.”
He added, “A lot of times for those [kinds of] companies, the company dies unless there’s a strong work force in place that can take over.”
Those in sole proprietorships may be able to use life or disability insurance as their business succession plan, Hoffmeister said. They have to ask themselves, “‘If this company can’t continue to operate after I’m gone, then how do I replace that stream of income?’ so it’s either life insurance or disability.”
However, as their companies grow, business owner clients have to consider their longer-term goals and objectives for the firm. “That is really going to tie in to what their succession plan is,” Hoffmeister said, whether they want to retain ownership or oversight or sell it outright.
Clients who share ownership with a partner should have a buy-sell agreement in place, Hoffmeister said, to continue the company if one leaves and provide income for the departing owner.
“As the company becomes more complex and more mature, the business succession plan evolves into much more specific detail. It can get into training employees to take your place,” he said. “You may be looking at a much more formal situation of putting a company in order to sell.”
Further down the road, business owners should coordinate estate planning documents with the company’s succession plan and have a governance program in place that outlines who will replace the owner, what their obligations will be and how to retain employees.
When they start planning, business owners need to ask themselves some questions about what they want out of their business. “What are your lifestyle expenses?” Hoffmeister said. “What’s going to make me independent for the rest of my life, or if I’m going to start another company. You need to know what your bottom dollar is.”
Then they have to position the company to be able to meet those needs. For example, if part of their succession plan is to sell the company to employees, business owners “need to make sure the employees can afford to purchase” it, Hoffmeister said.