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Life Health > Running Your Business

Advising Business-Owning Clients on Succession Planning

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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.

Almost as important, owners should ask themselves what role they want to have after they sell the firm. “If you sell to the employees, are you going to stick around and work for them? Are you going to sell some share to the employees and still retain control? Are you going to become a CEO or chairman of the board?”

Business owners should revisit their succession plan whenever the company changes or key employees change, Hoffmeister said. “When you have a change in employees, you have to think, ‘What do I need to put in place to replace that person and how do I keep that person?’”

If family members are part of the business, it adds another layer of potential change that could affect a succession plan. “If there’s a change in your family, you get married or whatever, those are trigger points where you want to look at the continuity of the company.”

He said, “With every business succession plan, I think one of the fundamental things that even if you’re a startup you ought to be thinking about is ‘Am I going to keep this company? If I’m going to sell the company, who am I going to sell it to?’”

Whatever they decide to do, communicating the plan to those involved is critical and sometimes overlooked, Hoffmeister said. “It’s the softer side of business succession planning, but it’s also one of the more difficult sides, especially if you’re in a situation where you have family members in the business,” especially if you have several family members but only a few who are qualified.

“How do you communicate to them that you’re selecting the appropriate child to take over the business, which also means that you’re telling other children who are in the business, ‘Hey, I don’t think you’re qualified.’ In some cases, it may just be that they’re not ready.”

Furthermore, owners have to address how the transfer of the business to one child will affect other family members. “Are they going to be dependent on the working child? In terms of funding coming out, what’s fair in terms of distribution?”

Stress testing is also important, he said. “If you’re going to have the employees take over the business, the employer needs to start letting go,” Hoffmeister suggested, “and allow those employees to start making mistakes on their own. Clearly if you’re expecting an employee to take over, you want to build confidence in the employee: that they have the confidence to run the business and that you have confidence in them.”

Successors often have a different way of doing business from the original owner and, Hoffmeister said, “The hardest thing for a business owner to do is to let go of a company that they started from scratch.”

— Read 3 Critical Steps to Groom Your Successor on ThinkAdvisor.


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