What Will Happen to Your Business?
Family businesses account for 50% of the gross national product. Thirty-five percent of Fortune 500 companies are family businesses. Family businesses account for 60% of US employment and 78% of new jobs created. (from Gaebler.com ). Family businesses are important, yet most of them don’t survive the founding generation.
Most often, the founder of a family business is intently focused on starting and growing the business. Although in their heart of hearts, the founder may be dreaming of having a spouse, son, daughter, niece, nephew or grandchild keep their business baby going when the founder is no longer able, s/he most often does not focus on how to make that happen.
James E. Hughes (a sixth-generation family business member) is considered an expert on keeping wealth in the family over generations. In his book Family Wealth – Keeping It in the Family, he writes: “The most important role in the management of an enterprise is arranging for orderly succession.” and expands that to say “A families ability to stay in business over a long period of time always comes down to excellent succession planning.”
Do you have a succession plan for your business? If your family’s business is a public company, in which the family is a majority shareholder – you probably do have formal succession plans. But what if your business is a sole proprietorship and depends on your unique talents?
Perhaps you have started a consulting firm, or an accounting office, or law firm, or a successful blog that is pulling in an income stream. What kind of a succession plan can you have for these types of businesses? What are the things you need to think through to build one?
Things to consider in building a succession plan.
Here are my thoughts on things to consider in building a succession plan, but your situation will be unique and you should probably consult with an adviser (estate planning lawyer, accountant, etc) when deciding on your plan.
Do others depend on the income from your business?
If so, your plan should have a strategy to keep the income flowing until the dependents can find other sources of income.
What is your exit strategy from your business?
If you plan to sell your business during your lifetime, you will have a different plan than if you hope it will continue after you are no longer interested in it (for instance, if you die or move on to other things).
I’m hoping that my blog will – at a minimum – remain available on the internet for interested readers. My succession plan should have a provision to keep the web hosting and domain fees paid up for a number of years (oops – need to do that!).
What kind of business do you have – lifestyle or growth?
A lifestyle business is one that satisfies the needs of the owner. The main goal is to provide enough income yet allow the owner to set hours, physical location, amount of family involvement, travel requirements and etc.
A growth business is one that you intend to grow – no matter what the cost to your lifestyle is. It may involve long hours, moving around, lots of travel, lots of time away from your family and etc.
With a lifestyle business, your succession plans may be a bit simpler and less formal that with a growth business. A growth business will typically have parties external to the founder and his/her family involved – so your successor might not be a family member.
My blog is definitely a lifestyle business. My succession plan will involve as few legal documents as possible and I will need to start talking to my family about it a whole lot more so I can find out how interested they are in keeping it.
Under what legal structure is your business run?
Some of the various forms are sole proprietorship, partnership, limited liability company, S-Corporation, corporation and etc.
State and federal laws will dictate some of the succession requirements based on what structure you have. For instance, an LLC requires (in my state) an operating agreement in which you spell out what happens to the company when members are no longer part of the company (when they die, exit the company or become incapacitated).
Depending on the succession plan you map out, you may need to get some of your legal documents changed to implement it. For instance, my operating agreement states that the company will dissolve when I die, all assets reverting to my spouse. If I decide that my sons are interested in keeping it going, I would most likely change the wording in my operating agreement.
Is there a certain person that you want to succeed you?
Are you thinking your spouse would take over and keep the business going if you are incapacitated or dead? Do you hope your 2 year old daughter will grow up just dying to get into the business you started? Is your partner in the business willing and able to take over?
Not only will you need to make sure that the appropriate legal plans are in place, you will also want to confer with that certain person to make sure they remain interested in the business, to share ongoing operational information with them – so they could step in and in some cases, to provide ongoing training, mentorship and motivation to them so they are able and willing to take over.
I’m secretly hoping that my family will keep this blog going if I am incapacitated or when I die. I haven’t done anything about this secret hope yet, because I felt I needed to make sure the blog is well established first. If I suddenly died today, this blog would be gone in a few months because the web hosting fees would not be paid and the domain would expire! In addition, I haven’t really shared my hopes with my family and have done nothing to see if they are interested and able to keep it going.
Is your successor prepared ?
Are they old enough to operate the business? Are they able to find out what the current status of things are? Are they still interested in being part of the business? Are they physically and mentally able to operate the business? Do they have the requisite skill set and knowledge to successfully run the it? What, if any, ramifications to the business are there when your successor takes over. Consider having a backup plan in place, in case your chosen successor won’t be able to serve.
If your succession plans fall through, is your family prepared to deal with the consequences?
If you don’t get your plans in place, or if you don’t execute them well enough to make them stick – before you die or become incapacitated, what will your heirs do?
They may be forced to sell the business to generate money to pay taxes. Do they know who to go to in order to get it sold?
They may need to find operational information to manage the business until your estate is settled. Do they know where to look to get online accounts, or user names and passwords? Will they know what bills are due and how to pay them? Will they know what receivables need tracking?
Put yourself in their shoes, today. Discuss with them (or write out instructions and include the location in your estate plan documents) what you think they ought to do if you died tomorrow.
Life marches on, death doesn’t wait
If you care about your business and the people who depend on it – take action today to begin to define your succession plans!
What else should be covered in a business succession plan? What are your plans for your accounting service, consulting firm or blog when you die?
Here are a few resources to get you started: