One of my fellow advisors related one of the most horrific stories I have heard in my professional life. I would like to share that story with you in order to help you understand the importance of business succession planning:
A young man in his early forties owned an extremely successful manufacturing business in Georgia, grossing approximately $10 million annually. Accordingly, his wife and two children were accustomed to a comfortable life. The children were in junior high school and the wife was a stay-at-home mom.
One evening, this young man was killed in a car accident. He had only $100,000 in life insurance and no savings. His wife knew she could not run the business and must sell it for her family to keep afloat. After six months on the market and no potential buyers, business sales had drastically declined. Four months later a potential buyer from California made an offer for only half of the original asking price. Desperate, his wife took the offer. Yet, the buyer’s bank in California said they were too leveraged at the current time and would only loan 40%. In order to make the purchase, the buyer asked that the remaining 60% be owner financed. Desperate, his wife took the offer.
The manufacturing company was never able to fully recover from the decline in sales, and the buyer from California was unable to repay the debt to either the bank or the wife.
Most people think of retirement when they hear the words ‘business succession planning.’ As you now know, this is not always the case. For every stage of success in a business, a business succession plan should be in place. The Austin Family Business Program of Oregon State University performed a study on business succession plans in the United States. Amazingly, fewer than 30% of family business owners have succession plans.
Why? My guess is the complexity of the information and the complexity of the process. Most business owners would not even know where to start. Basically, you have four scenarios to begin planning for:
- Transferring your business during your lifetime
- Selling your business during your lifetime
- Transferring your business at death
- Selling your business at death
And as the preceding story painfully illustrated, you need to prepare for an unexpected death.
Next, decide “to whom”. Are you transferring or selling your business to your heirs, your employees or a third party? Just simply decide who you would like to receive your business.
Then set your course: Let your Life Consultant worry about how you would proceed, working with both your attorney and CPA/accountant. There are several avenues with many side streets: You might need a GRAT, CLAT, FLP, LLC, ESOP, CRT, CRAT, CRUT, ILIT and/or buy-sell agreement. Lost? Don’t feel alone. Each of these anagrams represents advantages and disadvantages when confronting specific taxes, legal implications, accounting demands, family dynamics and other issues. Discuss these issues and options with your Life Consultant and decide what path is best suited for you.
The only “how” you need to worry about is installing the next generation of your company. Do you want your business to remain after you are gone? If you are transferring or selling your business to your heirs or employees, there is a lot a groundwork that will need to be laid.
- Start Early. How long did it take you to get where you are? Your experiences and knowledge cannot be assumed by your successor overnight.
- Consider the business skills of your heirs or employees, and the impact of your business decisions on your family dynamics.
- Sit down and talk about your goals and the goals of your heirs or employees with Often times you think you are on the same page, but in reality you aren’t.
- Set a plan of action and review this plan on a quarterly basis. It is vital to your company’s success that everyone involved is fully aware of current developments.
Last but not least, review your succession plan with your Life Consultant on an annual basis, and especially after life changing events. Life happens and things can change with unexpected consequences.
If these are issues that are keeping you awake at night, I strongly encourage you make the decision to take steps to put your mind to rest. We call this “Living Life on Purpose!”