The importance of succession planning for business owners.
Business ownership is an adventure that requires careful planning and forethought to be successful. Surprisingly, even the savviest business owners often overlook the need for a succession plan in the event of their demise or incapacity. What they don’t realize is that even if they don’t have a plan for what happens to their business under these circumstances, others probably do. Here are some examples.
Your Company’s Bank
If you don’t discuss with your bank what your wishes are in case you become unable to run your business, then your bank will have to protect its interests in your company in ways that may not be what you had envisioned. For example, if you don’t ensure that there’s cash available to hire a manager to carry on in your stead, then the bank’s trust department may want to convert your company’s stock into liquid marketable securities that can be easily converted to cash.
The bank’s commercial department may also call your company’s promissory notes, making the balance of your company’s loans due immediately. This can result in a detrimental effect on your company’s credit at its most vulnerable time, as well as your family’s credit if you personally guaranteed the loan.
Your Company’s Managers
One or more of your managers may decide that they should take over your business or move on to one of your competitors, and they may have some leverage to do either based on their position in the company.
For example, your sales manager could take your company’s clients and form his or her own company or go work for a competitor, taking those relationships with him or her unless you have a covenant not to compete in place. Your operations manager might decide to take his or her knowledge of how your company functions to one of your company’s competitors for a pay raise.
A split-dollar life insurance policy or a deferred compensation plan could motivate your managers not to make these moves, since they would be missing out on a substantial portion of income if they did.
Your Company’s Competitors
For the reasons above, your competitors might attempt to poach your key employees for their knowledge and relationships. They might also smell blood and try to buy your company at a distressed sale price, especially if your family needs income right away in light of your inability to generate income any longer. The Internal Revenue Service would value your business based on the revenues it generated as a going concern before you became indisposed.
Your wife or husband, son or daughter, or any other family member may decide that they should take over the business regardless of their knowledge of how it functions. This could prove disastrous to the business and to the family dynamic. Even if you’ve groomed a family member as a successor, jealousies can lay the groundwork for an intrafamily conflict over the ownership of your business without you.
No matter what, it’s important to realize that many people besides you have plans for your business in the event of your untimely incapacity or demise. All of these issues can be addressed ahead of time so that your vision for your business will remain intact and its legacy will be preserved whether you’re there or not. No one can predict the future, but having a business succession plan is a way for you to maintain control of your company regardless of whether you are able to continue running it or not.