Why Every Business Owner Needs a Succession Plan

Like most people, business owners are usually concerned about their own financial security, providing for their loved ones, and keeping their family happy. However, farmers, ranchers and family business owners often have the additional concern of keeping the business successful after they’re no longer running it—since they (or their family members) often depend on the business to provide continuing financial resources.

A sound succession plan addresses the goals that business owners have for themselves and their family. It can also enhance the value of the business by making it less dependent on the talents of the owner. Typical goals for succession may include:

  1. Financial Security in Retirement

Some business owners anticipate and plan for their retirement. Others cannot envision life without the business and have no intention of retiring. Even those who have no intention of retiring must acknowledge that circumstances beyond their control may force them to stop working at some point. An exit strategy ensures that the owner and the family will be able to withdraw adequate financial resources from the business at the owner’s retirement, whether voluntary or not.

The amount of financial resources available to the owner (or the family) when the owner is no longer working will be limited by the value of the business. Planning for ownership and management succession actually enhances value because planning minimizes potentially costly disruptions and disagreements that can take place when the transition happens without preparation.

Most owners are concerned about providing financial security for their spouse and children during their life and after their death. A closely held business often represents the owner’s most significant asset. Planning for the transfer of ownership and management control can ensure that the value of that asset is preserved for the owner’s dependents.

Planning for management succession can significantly enhance the business’ value and maximize the wealth transferred to the owner’s family. Without planning, it is very likely that the value of the business will decline because the management successor is inexperienced, unprepared, or not well received by key employees, customers, suppliers, or other important third parties.

A closely held business is usually more than a way for the owner to make a living. A business often gives the owner power and prestige in the community. It can also represent the owner’s legacy to his children, both financially and in terms of family identity. In addition, many owners have strong loyalties to employees and customers with whom they have worked for many years. Ensuring the business’ continued success is often a very high priority for the owner.

Planning for management succession ensures that the owner’s death or retirement will not disrupt business operations, as the management successor is prepared to step in immediately and make business decisions. Sound planning for management succession also includes introducing the potential management successor to key third parties such as customers, suppliers, and bankers. This enhances those parties’ confidence in the management successor and allows him to carry on “business as usual” rather than having to prove himself.

Finally, a sound succession plan balances the needs of the business with those of the owner, which helps ensure that the business is not adversely affected by actions designed to benefit the owner. For example, plans for the owner to withdraw cash after retirement are evaluated not only by whether those payments satisfy the owner’s liquidity needs, but also by their impact on future business operations. This helps ensure the business’ continued viability after the owner’s departure.

Succession planning should always involve clearly communicating to each family member his or her “place” in the business. Transitioning management responsibility and ownership in a family business may cause the owner to make some painful choices. However, a planned transfer also forces owners and their family members to discuss their goals with respect to the business. Communicating these goals to each other ahead of time is ultimately much less painful for family members than spending a lifetime hoping their parents’ plans for them in the business match their own.

When the owner has multiple children (especially if some are active in the business and some are not), planning to transfer ownership in the business can avoid pitting the active children against the inactive children. Creative solutions can lead to constructive outcomes when the goal is to transfer wealth equitably without creating family conflicts.

Succession planning may also include devising ways for family members to work together for the good of the business. Although every family member might not be chosen for his or her first-choice position, all should be given an opportunity to work together and to voice an opinion. Formalizing this process can be helpful, especially when tensions exist between family members. For example, family members can collaborate on a family mission statement or a list of business values. Sometimes creating a family council to make important decisions about the business’ direction strengthens the family identity and provides family members with an opportunity to work together towards a common goal, which often translates to increased family harmony.