If you are a business owner or you are a partner in a business and you do not have a clear and adequately funded succession plan (or buy/sell agreement) you are putting everything you have worked so hard for at risk. The omission will sit like a ticking time bomb, seldom heard or considered, until it explodes – and then it is too late.
If you own a business, chances are that someone at some time has tried to talk with you about succession planning. You might have created a succession plan or a buy/sell agreement when you structured and started your business. If you created a plan early in the life of your business, you probably have not revisited it and updated it since it was written. Having no plan or having an outdated plan is not uncommon. In fact it puts you in a category with about 80 percent of business owners.
In 2005 the Association of Chartered Certified Accountants in the United Kingdom conducted a study and found that 30 percent of all small business closures occurred because the firm had no effective succession plan. In the U.S., PriceWaterhouseCoopers conducted a study of “closely held” businesses. Their data indicated that 90 percent of owners of closely held businesses hope to transfer ownership, control and management of their businesses to family members or key non-family employees. The study also revealed that less than half of these business owners can expect to actually do this.
There are a couple of misconceptions about succession planning that keep business owners from recognizing the importance of a plan. The first is a limited understanding of the events that could occur and need resolution from a succession plan. People tend to think about succession planning only in connection with some uncomfortable possible events – events they really don’t want to think about. The three possibilities that usually come to mind when business owners are asked to think about succession planning are death, divorce and disability. These are excellent reasons to think about succession (exit) planning. But there is far more at stake in succession planning than these three possibilities.
The second misconception about succession planning is that its purpose is to ensure an adequate income for your family after your death. While this is an important part of succession planning, it fails to consider the fact that you are far more likely to leave a business for reasons other than death and it fails to consider the effect of such a critical change in the company on the business itself, your partners, customers, vendors and employees.
Here are ten life events that should be covered by a business owner’s succession plan:
1. Death of a partner or sole owner
2. Early retirement of a partner
3. Disability of a partner
4. Disagreements between partners on critical business matters
5. A partner does something illegal
6. One partner gets a divorce
7. One partner has personal credit issues
8. The company wants to borrow money
9. The firm wants to bring in new partners
10. One partner needs to get money out of the partnership for personal needs
According to the U.S. Census Bureau, about ten million of the estimated 15-18 million privately owned businesses are owned by people between the ages of 53 and 72. Only ten percent of the business owners who plan to retire in the next ten years have an up-to-date and fully funded succession plan.
If you are one of the millions of business owners – of any age – who has no succession plan or exit plan, you need to understand that you are jeopardizing your own retirement, the financial security of your family, and the future of the business you worked so hard to build – and the people who depend on it. Don’t risk everything that is important to you.
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