Information Station

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Don't neglect your succession planning
Succession planning

Succession planning can be one of the most difficult issues faced by a family-owned business. As a business owner nearing retirement, how do you transfer leadership (and perhaps ownership) and keep the business running smoothly? Unfortunately, many businesses don't survive the transition to the next generation.

As with most business problems, good planning is the key. You'll need to consider four sets of issues:

  • Choice of a successor. Often the first preference is for a family member to take over. But the obvious family members may lack the skills, temperament, or interest to run the business. Sometimes several family members are interested in the position, and family squabbles or rivalries can interfere. That's why an outsider is often chosen as an independent manager.
  • Transfer of ownership. Whether or not a family member takes over the top position, you'll still eventually need to transfer ownership to the next generation. That involves questions of estate planning, taxation, and form of business. This is an area where you'll need sound legal and accounting advice.
  • Liquidity. Often a transfer of ownership involves issues of liquidity and funding, especially if it happens upon the death or disability of the founder. You'll need to consider key man life insurance and disability insurance, as well as tax and estate planning issues.
  • Personal issues. In a family-owned business, it is often very difficult for the founder to retire and hand over his or her "baby" to someone else. And if a family member is the successor, the potential for interpersonal conflict increases. It's essential to confront and discuss this issue beforehand. It can be useful to have one of your professional advisors mediate these discussions.

One factor is common to all business successions. It's never too soon to start the planning. Don't delay until retirement is imminent. This is a mistake for two reasons. First, your initial succession attempt may not work out. Second, a sudden accident or illness may force you to change leadership earlier than expected.

If you're facing this situation, please plan now to do something about it.