Why Is Business Succession Planning Important? 

95% of businesses are family-owned and family-owned businesses generate 40% of the Gross National Product. However only 30% of family-owned businesses have a succession plan and only 57% of owners of family-controlled businesses intend to transfer the business to family members, with 7% planning to close down the business on their retirement. 

Only 17% of owner managers believe that they need external help with succession planning but national research suggests that two thirds (68%) of SMEs do not know what succession planning is. As a consequence only 30% of family businesses survive into the second generation.

More than 50% of the business owners have more than half of their wealth tied up in their business, but one-third of family business owners are 61 or older. Owners aged 65 or over are the most likely to anticipate closure of their business in the next 5 years (35% compared with less than 11% for other age groups). However, they are among the least likely to anticipate a transfer of ownership.

71% of business owners over age 65 indicated that they would continue working indefinitely but 33% of all 35 year olds will be disabled for 90 days or more before reaching age 65. 

These are compelling reasons why succession planning is critically important to a family business. 

Family Business Issues 

Some key issues to consider when developing the family business succession plan are:

  1. Potential conflict between the departing owner (or his/her heirs) and the remaining owners over management of the company, control and/or money. 
  2. Potential friction between new management and heirs looking to participate in the business: 
  3. What incentives will work to keep key people? 
  4. Will heirs be forced to liquidate or sell to outsiders? 
  5. How will you retain income from the business or are there sufficient assets producing enough income to allow the business income to be used in funding the transfer? 
  6. If the business is gifted only to children active in the business, will there be an unequal estate distribution between those children and those who are not active in the business? 
  7. Will instalment payments impose too much of a burden on the company, especially when expressed in terms of the sales required to generate the after-taxed profits necessary for the principal? 
  8. Will the surviving spouse's financial security be held hostage to the children's ability to continue the payments after the principal's death? 
  9. If the business owner dies prematurely, is the stock retained by the surviving spouse? 
  10. What will the source of income be for the surviving spouse? 
  11. Will conflicts arise between the children and the senior generation?

SUCCESSION PLANNING CHECKLIST

The checklist detailed below provides a useful structure to lead the discussion and to support the business planning process in achieving a successful transition:-

A. GOALS AND OBJECTIVES

  • Have you defined your personal goals and vision for the transfer of ownership and management? 
  • Is your successor identified, ready, and in place? 
  • What is the importance of family involvement in leadership and ownership of the company? 
  • Identify family/stakeholder goals
  • Establish a team of Professional Coaches

B. DECISION MAKING

  • Involve family members in the decision-making process
  • Establish method for dispute resolution
  • Communicate wishes to family/stakeholders

C. SUCCESSOR(S)

  • Identify successor(s)
    •  Ownership
    •  Management
  • Identify required training for successor(s)
  • Provide training to build vision for the future of the business
  • Provide support to successors 

D.   ESTATE PLANNING 

  • Address taxation implications to the owner/business upon sale or transfer of ownership
  • Develop an estate and personal financial plan for owner, spouse and the succeeding generation
  • Are you dependent upon your business to meet your retirement cash flow needs?
  • Provide for active and non-active family members 

E.   CONTINGENCY PLANNING

  • Identify potential problem areas
  • Develop “What If” scenarios including action plans
  • Do you have a contingency plan should you become disabled?

F.   CORPORATE STRUCTURE AND TRANSFER METHODS

  • Is business to be transferred to family members or sold
  • Define roles and responsibilities for family members and key employees
  • Fill key management positions
  • Identify role(s) for retiring owner
  • Restructure the business, if required
  • Consult with professionals (lawyer, accountant, financier)

G.   BUSINESS VALUATION

  • Do you have a buy/sell agreement in place? 
  • Have you had your business valued recently? 
  • Do you have enough liquidity to avoid the forced sale of your business? 
  • Determine what is to be sold with consideration to: profitability, business location, inventory level, financing of buyout

H.   EXIT STRATEGY

  • Determine method of transfer
  • Establish a timeline for implementation of the succession plan
  • Publish the Plan so that affected individuals are aware
  • Communicate regularly with all affected parties

 

I.   IMPLEMENTATION/FOLLOW-UP

  • Review the Plan on a regular basis and update as necessary