Succession Planning is a Must-Do for Every Business
If you are a business owner, your time at the business will end in one of four possible ways:
- You leave the business voluntarily.
- You become disabled.
- You die.
- You leave involuntarily (for example, due to bankruptcy).
One of these four things will happen eventually, so it makes sense to plan ahead. Every business owner should have a succession plan in place, so that the business keeps running smoothly no matter what happens.
Business owners tend to be Type A personalities. This is because they believe they can push through any problem by force of will and hard work. However, ignoring the issue won’t make it go away, and planning ahead of time means being able to meet the challenge on your own terms.
If you’ve never thought about succession planning before, here are some questions to consider:
How essential are you to the business?
What happens to the business if you’re not there tomorrow morning? Are you that critical that the business will fall apart? Are you the main salesman in the business? Do all decisions go through you? Or, have you built an organization that can be self-sustaining without you there?
How essential is your partner or some other key employee to the business?
I worked with a business that was co-owned by two brothers. One was the “inside guy,” and the other handled the outside. The arrangement worked really well for them. They had a plan — if one of them died, they wanted the business to be ready and positioned properly so that it could be sold to a third party. The working relationship was so essential to the success of the business that neither wanted to continue without the other.
Do you want your deceased partner’s spouse as your new partner?
If not, then you need a succession plan that calls for your partner’s spouse to be bought out of the business. This may paint a little bit of a horror story, but sometimes it’s what is needed to be done to avoid any future problems.
Do you have someone lined up to take over the business?
Are your children involved in the business, and are they the right people to take it over? If you don’t have children involved, have you identified the profile of a likely buyer? The best potential buyers of your business could be among your key employees.
If you haven’t identified a profile, have you thought about what that profile would look like and have you contemplated how you would go about finding a buyer? It’s important to remember that it takes time to position your business, which includes cleaning up your financial statements and maximizing your earnings, so that you can get the best business valuation when it comes time to sell.
There’s nothing worse than the forced sale of a successful business. The owners take a huge discount in a forced sale, if the business is even saleable. A well-crafted succession plan can help prevent this.
The role of life insurance in succession planning
Life insurance could be the funding source for that contingency plan. Life insurance provides instant capital to sustain the business during a difficult time. It can buy out the heirs of one partner, providing liquidity for both the family and the business. It can help replace any revenue lost during the transition. It can satisfy lending requirements that need to be fulfilled. It provides stability in the business during a crisis. Insurance can definitely play a role in succession planning.
Beyond life insurance, of course, come disability insurance and long-term care. Disability will have just as large of an impact on a business as a death and on family income. The practical and financial risks of all the different contingencies need to be accounted for in succession planning.
However, insurance doesn’t necessarily address all aspects of it. The first step is to ask the tough questions about who, what, and when. I once worked with two partners, who had a business that had grown considerably over the past few years. They had a buy/sell agreement in place, backed by life insurance, but the business had grown so much that the coverage was no longer adequate. Instead of launching immediately into a discussion of life insurance, I talked to them about the bigger picture of the business and how it fit into their life plans.
I got a call a few days later from one of the partners, who thanked me for asking those tough questions. Our conversation made him realize that he was ready to leave the business. He and his partner decided to split up, with his partner buying him out. My clients were so busy running the business that they hadn’t taken the time to address the larger issues.
Don’t be afraid to ask the difficult questions. You never know where the answers might take you. Think ahead, and realize that changes are inevitable. It may not be an easy process, but you will be in a better position because of it. If you have family involved, what position do you want to leave them in? What matters most is the legacy and the opportunity to deal with things on your own terms.