Be prepared

When meeting with small-business clients, some questions I often ask are: "When you retire, who will manage your assets so you can continue to live the lifestyle to which you have become accustomed? Will it be your children? Your key employees? Your job foreman?"

Most small-business owners do not realize if their succession planning has not been addressed, the people who will manage their companies not only will determine their incomes following retirement but also whether they will have businesses from which to retire.

For many business owners, the subject of a succession plan is not addressed until it is too late and the values of their businesses already have declined. When succession is not addressed earlier in the life cycle of a business, a business owner often is forced to retain an income from the business that amounts to a return on his lifelong investment. If subsequent management falters, the retiree will have lost income and a decreased asset value if the business is liquidated.

From the successor's standpoint, being forced to pay retirement income creates a problem by depriving the growing company of the lifeblood it needs to grow-cash. In most situations, this income could be used to expand the business, hire employees or purchase equipment. A business's failure becomes a possibility when these factors force the two generations to realize there is no plan to survive, let alone succeed. As a result, families often are torn apart.

Forming a plan

How can you avoid this situation? I suggest you create a written succession plan. The following list of business succession essentials highlights the most common areas of concern, as well as solutions to these concerns, so you can address them before it is too late.

  • Plan for successor management. Far too many small, family-owned companies assume successor management is a family right, not an earned right. The most successful businesses attempt to train family members first and then, if it is evident they are not prepared to run the company, hire outside talent to do so. If this seems harsh, it may help to realize many families other than your own depend on the success of the business. If selected carefully and honestly, the hired talent can manage the business and return a profit that exceeds the additional cost to recruit and pay them to run the business.

  • Fund an exit strategy. Cash is needed to fund your exit salary, hire replacement help, and pay for survivor income and estate settlement costs that occur from the transfer. Proper planning for this cash need will require a steady, consistent program.

  • Avoid succession conflict between family and key employees. Educating the parties involved about the roles and responsibilities of each job description and expected profit goals will help reinforce a team approach and reduce conflict. Another approach is to assign different job responsibilities to team members. Doing so will help reinforce accountability and give each member specific roles and duties that should not conflict with other team members.

  • Create an emergency plan for retirement, death or disability of key employees. If you create a disaster plan and list of important information in the event of an untimely death or departure, your business will run more smoothly because employees will not be searching for information. Questions such as, "Where are the important business documents? Who is the corporate attorney? Who can sign the corporate checking account? Who is the trustee for the retirement plan? Who signed the notes at the bank and are they due upon death?" should be answered in a written format that is easy to find when needed. Also, consider insuring key people to provide the cash needed to offset the financial effect of this loss.

Create a blueprint

You probably would walk away from a project if the plans were simply verbal and so vague that you could not safely complete the project in a profitable manner. Yet you may be asking your family, customers and employees to continue to invest their time and energy in your firm without a blueprint for the continuation of your business or the capital to allow the business to operate in a viable manner after your departure. By addressing these issues early on, you can create a written, enforceable agreement to ensure your company remains successful and profitable for generations to come.

Brian Heckert is president of PENFlex Services Inc., a business consulting firm with offices in Nashville, Ill., and Peoria, Ill.


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