Succession Planning: Why Every Entrepreneur Needs To Prepare For The Worst

Succession Planning: Why Every Entrepreneur Needs To Prepare For The Worst

September 2016


There’s a good deal of wisdom contained in the popular adage, “Hope for the best and prepare for the worst.” It holds especially true for business owners. We should be guardedly optimistic about our futures and cognizant of the fact some things are out of our control.

However, a recent study from the National Association of Corporate Directors suggests that most business owners are both hoping and preparing for the best, with a whopping two-thirds of public and private companies stating that they hadn’t instated a formal succession plan for their CEOs.

The future is unpredictable, and failure to institute a formal succession plan can bear devastating consequences for your business and your loved ones. Nobody knows this better than Amir Eyal, CEO of financial advisory firm Mylestone Plans. Eyal barely avoided said negative consequences when Bruce Myles, his father-in-law and former CEO of Mylestone Plans, fell ill unexpectedly and passed away shortly thereafter.

If an adequate succession plan had not been in place, Eyal would have inherited the entire business and its assets, and wouldn’t have been legally bound to compensate anybody, including his mother-in-law. Fortunately, Eyal arranged for his in-laws to write out an agreement before his father-in-law’s death, so that his mother-in-law would be properly compensated by a legally binding contract.

This story ended well, but the tragic situation Eyal and his father-in-law faced is, regrettably, far from rare. Unexpected accidents and illnesses can destroy a business and wreak havoc on families. To avoid the situation that Myles and his family narrowly avoided, Eyal suggests the following steps for implementing a successful succession strategy.

  1. Don’t procrastinate. For many business owners, the idea of formulating a succession plan comes to mind only when they’re thinking about retiring or leaving their company. But research shows that succession plans have much better outcomes when they’re done in advance. To that end, a study from the Family Business Institute shows that business owners had an 85 percent success rate when they began the process of succession planning ten years ahead of time. In comparison, those who waited until two years or less had only a 25 percent success rate.
  1. Identify a successor. This may seem like an obvious step, but there is a lot to consider when determining who will be the successor of your business. For instance, do you want to sell to a business partner whom you trust to provide continuity? Or will you opt for a potentially more profitable sale in the open market? And if you plan on transferring ownership to a family member, are you sure they are equipped to take on all the responsibilities of running your business? These are all important questions to consider when deciding who will take on your responsibilities as a business owner.
  1. Determine the current value of your business. Determining the value of your business can be the hardest part of the process. For buyers, it’s about calculating when you’ll break even and start making money from your purchase. For sellers, it’s about getting the most for your life’s work and paying the least amount of taxes. There are several ways to measure the valuation of a business based on its assets, its projected income, or on the market value of similar businesses. Regardless of which approach you use to assess the value of your business, it’s wise to have the assessment done by a third party to maintain the highest level of objectivity possible.
  1. Carefully structure the contract. There are a lot of ways to define the terms of a succession plan. In a standard cross-purchase buy-sell arrangement for instance, business partners lay out the terms of succession in the case of retirement, disability, untimely death, or any other triggering event. To protect against an untimely death, as an example, the partners would purchase life insurance policies on each other, so if one dies before retirement, the proceeds are used to purchase the deceased partner’s portion of the business. Other plans, too, such as a Grantor Retained Annuity Trust (GRAT) or Intentionally Defective Irrevocable Trust (IDIT), may prove viable depending on your company’s specific circumstances.

Nobody knows what the future will bring, no matter how certain it may seem in the present moment. And while business owners should look to the future with optimism, seeing the world through rose-colored glasses can cause us to inadequately plan for those unexpected curve balls life can throw at us.

Ultimately, as Eyal shows, being proactive in planning for succession will give you the confidence and peace-of-mind to know that your business and your loved ones will be taken care of—come what may.


This article was written by Larry Myler from Forbes and was legally licensed through the NewsCred publisher network.

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