By some estimates, family-owned businesses employ 60% of the U.S. workforce and create more than 70% of all new jobs. However, only 30% of family owned business last to the second generation of ownership, and only 12% last to the third generation or beyond.
There are several potential reasons for these statistics, but one of the major reasons is a failure of long-term planning. As goes the old quote, failing to plan is planning to fail.
Planning for the next generation of business owner goes by various names, including “succession planning,”“replacement planning” or sometimes “exit planning.” Understandably, many business owners have the concept of succession planning very low on their to-do list, instead thinking about making the next sale, or making the next payroll, or being lucky enough to enjoy the fruits of their labor.
But the reasons for succession planning are multitude. Eventually, business owners, just like all workers, will face retirement. They may encounter an unexpected health or family crisis. Alternatively, they may simply find that they develop changing interests and goals, regardless of age, company profitability or economic conditions.
Succession planning is not simply “Junior will take over when I’m gone,” though it could be. Succession planning often means a takeover by the next generation of family members, but it could also result in an outright sale of the business to a third party, or a merger with a competitor, takeover by non-familial employees, or even a gradual wind-down of business operations that still results in favorable gains.
Regardless of the eventual form the succession takes, substantial long-term planning is required. Generally, a business succession plan will take two or more years. Business owners need to consider the following steps:
• Identifying possible successors – Existing business partners? Family members? Junior workers? Potential outside purchasers?
• Maximizing company value to your successor by reducing business dependence on a single person.
• Maintaining clarity and transparency in planning.
• Sufficiently training eventual successors in all aspects of business operations.
• Identifying funding sources and payment parameters for the take-over.
• Preparing all necessary documents with your attorney, CPA, insurance brokers, estate planning specialists and any other necessary advisors.