Tweet

Effective Business Succession Planning

Written by: Chia-Li Chien

Article Overview: Business owners invest significant amounts of time and financial resources to make their enterprises successful. Quite often, due to the quick pace of day-to-day operations, planning for succession of ownership is relegated to a low-priority task. But there comes a point in the lifecycle of any business when the owner is no longer able to manage the firm that he or she founded.

Effective Business Succession Planning

By Chia-Li chien,
In conjunction with Sagemark Consulting
a division of Lincoln Financial Advisors, a registered investment advisor*

Business owners invest significant amounts of time and financial resources to make their enterprises successful. Quite often, due to the quick pace of day-to-day operations, planning for succession of ownership is relegated to a low-priority task. But there comes a point in the lifecycle of any business when the owner is no longer able to manage the firm that he or she founded.

Because the timing of death or disability is difficult to predict, it’s prudent to have a succession plan in place now to safeguard your family’s financial well being, and to provide your business with leadership during a transition period.

One logical solution—and one that most entrepreneurs may want to choose—is to turn the reins over to their children. However, despite its emotional and intuitive appeal, the odds are stacked squarely against a business surviving a transfer down the bloodline.

According to the U.S. Small Business Administration, two-thirds of family-run enterprises fail to make the successful transition to a second generation of ownership, and less than 15% survive into the third generation. Making a successful transition even trickier are issues brought on by divorce, blended families, or rivalries among children.

The best course of action may be either to identify strong candidates within your company who can continue to run the business and provide a source of financial security for your family, or to look at the potential for selling the business to an outside party.

Whichever course you eventually decide is right for your business, there are steps you can take now that will ease the transition.

• Groom new management. Who is best able to run the business in your absence? Perhaps your children have spent years growing up in the business and have become capable managers in their own right. If not, look to your existing management team, and make your intentions known. Be sure that candidates are capable and interested in taking over.

• Determine a value. Work with a valuation specialist to get a fair assessment of what your business might be worth. While valuation analysis may be an art as much as it is a science, you should place a value on your business in the event you decide to sell. There are several valuation methods, including book value, discounted cash flow, or you could hire a professional appraiser. If you decide to transfer the business to your children, a professional appraisal is generally required to withstand IRS scrutiny.

• Draft a buy-sell agreement. Depending on the structure of ownership, this document will be a binding agreement detailing the terms of ownership transfer between you and your offspring, you and a non-family successor, or you and your partners. Be sure to specify how the agreement will be funded.

Proceeds from a life insurance policy are frequently used as a way to fund a buy-sell arrangement. Other options include loans from a bank or company earnings that are paid back through an ‘earn-out’ arrangement with your successor, whereby the loan is paid back in regular installments.

• ESOPs. If you have a large number of employees, another option is an Employee Stock Ownership Plan (ESOP), whereby a bank lends money to the ESOP to purchase your interest in the business, and the employees then buy the shares through regular payroll deductions.

Planning for succession can be an unpleasant task, although the outcome can be even more unpleasant if you fail to plan. You’ll have a lot more options if you start to plan when things are going great. What you don’t want is a situation where your family is scrambling to salvage some value from the business after you’re gone.


Chia-Li Chien, CFP®, CRPC, CTEP ™, CWM™, PMP is a registered representative of Lincoln Financial Advisors, a broker/dealer, member SIPC, and offers investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor, 6000 Fairview Road, Suite 1550, Charlotte, NC 28210-216; Phone: 704-943-2118. Insurance offered through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.

CRN200804-2015934

Related Articles
  Guess What? Succession Planning is not Rocket Science
  Succession planning myths and realities
  Succession Planning - Vital For Your Business At All Levels
  “Do You Know Where Your Succession Plan Is? And Do You Know What To Do If You Can’t Find It?”
  Succession Planning - Your Route To Sustainable Business Success

Article Tags:



Related Forum Posts
HRPreneur - Hi everyone, I am new to the forum and I recently started my own Human Capital (HR) consulting firm called HRPreneur Inc. HRP focuses on making human capital a strategic differentiator for SME's. Below is a summary about HRP; Who We Are: HRP is a Human Capital consulting firm with 30 years of experience that becomes an extension of your company by providing a full array of services to help you create a highly engaged workforce focused on achieving strategic results in order to build a long lasting great company! Mission: HRP provides small and medium sized businesses a Strategic HR Business Partner to increase employee engagement, resulting in cost savings, increased productivity and results at an affordable rate! Vision: To inspire and warrant SME's reach their full competency! Cost Effectiveness: We provide over 30 years of experience at a fraction of the cost at a strategic executive HR business level You will save between 50% to 60% in costs per year on salary, bonus, benefits, training, office space alone We will provide you additional cost efficiencies through our services Services: • Strategic Human Resources Planning • Organizational Redesign • Change Management • Organizational Culture Development • Employee Engagement Programs • Leadership Assessment and Development • Compensation Design • Talent Acquisition • Assimilation and On-Boarding • Performance Management • Talent Management & Succession Planning • Human Resources Due Diligence • Human Resources Audit • Full Service HR Outsourcing
My entry - 1. The Best Business Books Ever: The 100 Most Influential Business Books You'll Never Have Time to Read - this is a fascinating book about the history of Business theory, and I'd recommend it to anybody. 2. The Big Book of Small Business: You Don't Have to Run Your Business by the Seat of Your Pants, by Tom Gegax. Ditto. 3. PADI: The Business of Diving Book Okay, so this book won't be of use to anyone who doesn't want to start a scuba store, but I did, and this book was of course invaluable to me in reaching that goal.
Seek Venture Capital & Funding - Hello, Greetings from India. I am Seeking Venture Capital for Offshore Software Company Start-up. Need advise along with Business Model Sample. I have a basic outline for an offshore company. 1. Technology - like Microsoft Dot Net, Java, LAMP 2. Talent Team - Found Good Technology Developers. 3. Where I can get the leads/potential customers - Leads have been identified who are willing to move forward offshore projects. 4. I do not have resources like funding. It is a very critical factor to me Industries: Manufacturing, Real Estate, Retail, Insurance, Distribution & Logistics, Healthcare, Industry Associations and Software Product Development, Agricultural Industries and Etc. Services: Offshore Software Development Company. Offices to be located: Hyderabad, Andhra Pradesh, India and USA. Products/Services/Applications in areas like POS & Billing, Sales & Distribution, Production Planning, Material Management, Inventory Control, Plant Maintenance, Purchasing, Accounting and Logistics. Dynamic Web Programming with Database Driven Content Management Systems, Online Stores for E-Commerce, B2B Solutions, Community Portals, Website Redesign and Development, Custom ERP with Enterprise Wide Functional Modules such as Marketing, CRM, Accounting, Inventory Control, Sales & Distribution, Production Planning, Purchase & Stores, Logistics and Supply Chain. Seek your further questions and help. Thank you, Best Regards, Jayapratap.
Re: How do you make the most of your day? - Planning, To Do lists, and deadlines all help me. Also being self critical of my own time management helps me raise the bar. I still check email too often though.
Re: Success - I think it was Gary Player who said the harder I practice the luckier I become when it came to his success as a world class golfer. Planning and dedication to a task can make all the difference between success and failure. MichelleJ


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Top 5 Qualities in an Outsourcing Company

Designing Employee-Enhancing Training Programs

E Mail Marketing Campaigns

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.