Broker Check

Plan for Your Company's Survival

Plan for Your Company's Survival

 By:  Craig C. Bartlett, CFP®, CRPC®, CBEC®

March, 2018

As the founder, owner and manager of your family business, you probably have a hard time imagining anyone else running your company as well as you.  You may be right, but that mind set spells trouble.  Even though you know better, many successful entrepreneurs like yourself choose to ignore the need for planning for their business succession until sometimes it is forced upon you!  Unfortunately, this can reduce alternatives for your consideration, limit your control and tends to yield unwanted results.

For many, it's a question of facing up to their own mortality, confronting a real possibility of incapacity to run the business they started or the real fear of giving up control.  In addition, it means making a difficult choice of a successor from among their children or valued employees.  Since many owners' income and assets are tied up primarily in the business, passing it on means not only starting to give up control, but also a genuine concern for their personal financial well-being and security.

Family businesses face other problems too: sibling rivalry, squeamishness among family members about addressing tough business issues, and a lack of talented or willing management to carry on the business into the next generation.  To avoid a family rift, many families avoid the difficult question of what will happen to the business after the entrepreneur retires, or worse abruptly dies with no clear plan in place.  True, emotions are part of nearly every decision affecting the future of the company.  But the business owner must be able to objectively assess the business from both a personnel and financial point of view, and then decide to do something about it to protect themselves, their family and their business.

Failure to adequately prepare for the future has been the death knell of many family businesses.  Per a study by the Wharton Business School of the University of Pennsylvania, only about one-third of family-owned or controlled businesses survive into the second generation.  And the odds of continuing into the third generation are even slimmer. 

Waiting too long to put a business succession plan into place can also damage the business itself.  Customers, creditors, suppliers, and even employees grow nervous about whether the company will fall apart once the owner is gone.  Without a clearly defined strategy for a successful succession, your family business may begin and end with you!  This in turn hurts those you care about most; your family, your employees and your customers.    


Creating a Successful Succession

If you want to be in that one-third of businesses that survives, planning is essential.  A business continuity and succession plan is a documented road map for your partners, heirs, and successors to follow in the event of your departure – voluntarily (retirement/sale) or involuntarily (death/incapacity).  It should include a strategy for distributing ownership, decision making and other company assets along with a written Buy-Sell Agreement properly funded with both life and disability insurance to provide for the immediate liquidity needs (loans/buy-out/new hires/taxes).  These represent the two triggering events where you can leverage your money in a tax-efficient manner when compared to other alternatives.  A back-up plan should also be documented to orchestrate the sale of your business if your children aren't interested or capable of running it.   


Plan for the Unpredictable

A viable business succession plan should, above all else, remain flexible and keep you in control.  All too often business, family, health, and partnership situations change at a moment’s notice.  You need to be able to easily modify and amend your plan to adapt to any changes that lie ahead.  Consider these examples:

  • For years, your daughter has been an active player in your business; she's come up through the ranks and her last three deals netted a hefty profit for the company. Now it turns out your son wants in, too.  His legal background will be a big plus.  But how will you divide company ownership and leadership responsibilities between them without causing family friction?
  • What happens if someone on your management team is suddenly incapacitated and most likely won't be returning to work? What if your partner and their spouse divorce and the settlement calls for a portion of their business ownership be divided?  Or, what if you need an infusion of capital to take advantage of a sudden expansion opportunity?  Whatever the situation that might arise, is your business structured to handle unexpected changes and opportunities?  Be prepared with a plan that can meet the challenges of life's twists and turns.  It is not a question of “if” a triggering event will happen; it is which one and when?  Will you be fully prepared?



Who Will Carry the Torch? 

      And not put out the flame!?  Is there anyone out there who can run your business with that same undeniable style and acumen that you've brought to it?  There won't be unless you're there to teach that person how.  By grooming a successor now, you'll be able to impart the knowledge and experience you've accumulated over the years, and be assured of continuity in leadership style and, hopefully, profitability after you're gone.  Picking a successor can be a minefield, especially if you have a choice of equally qualified children or employees.

With more than one child involved in the business, sometimes you must decide which one gets to be boss and which merely get an ownership stake.  There is a significant difference between simply being an owner and a true leader.  How will you divide assets “equitably” among your heirs if some are active business participants and others are off in their own careers?  Remember, equitable does not always mean equal.  The distribution of power and assets among siblings can be a highly divisive issue, even in the happiest of families.  Countless family businesses have folded because of discord over these problems.

Your challenge: divvy up business responsibilities and assets in a way that allows your business to survive while preserving family harmony.  If you're fortunate, you may already have a capable child whom you'd be pleased to pass the reins to.  Once you've chosen your successor from among your children or key employees, the only hitch then is keeping the others interested, loyal, and productive despite the feeling of being passed over.  The same also stands true for your employees – will they respect and follow the decision making of your new chosen leadership as they have you for years?

No likely candidates among family members or your employee pool?  That's a warning sign you cannot afford to ignore!  Especially if monetizing your business is required to fuel your retirement years that you’ve worked hard for and deserve. Begin by asking yourself honestly, is your management style hampering employees from turning into leadership material?  Or, are your hiring and training programs simply not doing the job you intended?  Do you have the right people on the bus but in the wrong seats?  While it is difficult for any business owner to let go entirely all at once, you can begin by gradually letting go and training the next generation of leadership as it may be the only way to protect you, and your company's future.  Be sure to make career advancement and management training programs a top priority.  Most importantly, communicate them early and often.

Don't wait until it's too late.  Keep in mind that business succession is a transition, not a transaction.  With the guidance of qualified business minded advisors, you can put in place a business continuity and succession plan that will give your business the secure financial and vetted leadership to improve the probability your business will not just survive, it will thrive.


Next Steps – Plan

As a Certified Business Exit Consultant (CBEC), we specialize in working with both business owners and executives to develop tangible continuity and succession strategies that are legal, tax conscious and viable for your business.  Continuity is keeping together what you have already put together.  Succession is passing the torch without putting out the flame.  We welcome the opportunity to review your current plan by facilitating a fire drill or dress rehearsal. Or, we can further discuss your unique circumstance to determine if we are the correct fit and can help protect, preserve and monetize your life’s work by devising a strategy that works for you.  Give us a call, you deserve it.

Craig C. Bartlett is a registered representative of Lincoln Financial Advisors Corp.  Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and a registered investment advisor.  Insurance offered through Lincoln affiliates and other companies.  Branch Office:  61 South Paramus Road, Suite 425, Paramus, NJ 07652.  Lincoln Financial Advisors and its representatives do not offer tax or legal advice.  Individuals should consult their tax or legal professionals regarding their specific circumstances.  CRN-1743764-032417