Finding time and enough resources to commit towards a multi-step, multi-year succession plan, while managing the controlled chaos of running a business can be daunting. When time is the most precious resource we have, spending it thinking about how to get out of a business we spent our lives getting into seems illogical. However, those same thoughts may contribute to the reason that only an estimated 30% of closely held businesses survive into the 2nd generation of ownership and less than 15% successfully transition to the 3rd generation.

Most experts suggest succession planning should begin anywhere from 10-15 years prior to the desired exit from the business. However, what about in the case of a death or disability of a key owner, officer, or manager? Furthermore, what if that same closely held business is responsible for 400 jobs in a community of 2,500 residents? The company has a significant responsibility to that community and its prosperity.  This speaks to the “sooner rather than later” theory, where it is never too early to build a succession plan. Owners of every age should  consider a succession plan and how it can protect against unforeseen circumstances.

Below, I have outlined the three phases of a succession plan which will be examined in more detail, along with real life case studies we’ve experienced, in upcoming issues of the Forensic and Valuation Viewpoints newsletter.

Goal Setting – Plan for yourself and the company

  • Accepting the importance of a succession plan and committing to pursing one
  • Planning for the unexpected
  • Longevity of the business and its importance to the estate plan – personal wealth
  • Income for self in retirement
  • Income for family
  • Family meeting
  • Chance for owner to do something else
  • Establish the team – accountant, valuation professional, attorney, insurance underwriter, other relevant professionals

Who Will Takeover – Transfer of operations, management, and control

  • Family members
  • Key employee(s)
  • Develop a mentoring program
  • Hired-in outsider
  • No one – selling to 3rd party

How Will We Do It – Actions steps to make and document the plan

  • Buy-Sell Agreement
  • Employee Stock Option Plan (ESOP)
  • Sale
  • Life-time gifting
  • Post-mortem considerations
  • Documenting your succession plan
  • Willingness to review and revise if appropriate succession plan

Succession planning is not a process that is completed overnight and the best chance of success requires investing considerable time (even years!). Stay tuned for additional articles outlining client case studies we’ve experienced. In the meantime, contact us at one of our offices in Iowa or Illinois to discuss your needs.