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Why Business Succession Planning is Important And Getting an Early Start is Critical

Learn about Business Succession Planning discover why it is critical to get an early start on succession planning. Learn more from the Fresh Insights article.

 Most owners of small and mid-sized firms have worked hard their entire lives to build successful enterprises. Given this, it’s surprising how little time and attention many have devoted to their eventual exit from the business one day in the future.
 
“Failing to start planning well in advance of their planned exit date is one of the biggest mistakes we see among owners when it comes to succession planning,” says Phillip Hamman, CFA CFP®, managing director with Linscomb & Williams. “There are often competing interests to balance, and it takes time for a good plan to evolve — whether the business will be sold to an outside buyer or will remain family-owned and closely held.”

 

 

 

Most Important Issues

According to Hamman, most small and mid-sized firms are privately held and often family-owned. “In these cases, important issues may include liquidity for the owner, business value and family dynamics,” he says. “The business typically accounts for the vast majority of the owner’s wealth, so it’s important to make sure there will be sufficient liquidity for his or her spouse or heirs.”
 
Hamman identifies three priorities owners should consider as they begin succession planning: building liquidity outside of the business, identifying potential buyers (whether family or non-family), and overall diversification. “Building value is also important,” he adds, “but there are different perspectives that need to be considered when it comes to valuation.”
 
In most instances, owners will want to maximize the value of their company before putting it on the market. However, this isn’t always ideal for estate planning and wealth transfer purposes. “Having a plan that addresses both is essential,” says Hamman.
 
When it comes to identifying potential buyers for the business, these successors can be either family or non-family members, or a combination of the two. “Where family members will be involved, there is generally more focus around estate planning and efficient transfer of the business, as long as the liquidity issue has been addressed,” says Hamman.
 
It’s also important to address how to deal with family members who will not be directly involved in succession but will have an ongoing economic interest in the business. Meanwhile, with non-family employees, there is often more consideration around a potential sale, says Hamman. “This may bring about feelings of discomfort for the founder, who wants employees to be well taken care of and the corporate culture that has been built to remain intact.”
 
Many owners also must contend with the loss of control that comes with the transition, which can be unsettling for those who’ve previously had a high degree of control and a strong understanding of their business and industry. “As owners become more passively involved, their decreased level of familiarity, transparency and control may cause some to feel as if they are gambling with the wealth.” A succession plan can help combat these concerns. 

 

 

 

Your Succession Planning Team

As you begin the succession planning process, be sure to take the time to assemble a top-notch succession planning team. This typically includes your business attorney, accountant, banker, insurance agent, wealth manager, and key family members and advisory board members. Start by answering some key questions, such as:
 
  • Will you sell the company to an outside buyer, transfer it to employees or managers, or keep it in the family?
  • If you plan to sell to outsiders, will you look for a strategic buyer, a complimentary buyer or a private equity firm?
  • If you plan to transfer ownership to insiders, will you use an Employee Stock Ownership Plan (ESOP) or Management Buyout (MBO)?
  • If you plan to keep ownership in the family, have you identified the next generation of leadership and started preparing them for this responsibility? 
Hamman says that five years out from your planned exit date is not too soon to start the succession planning process. “In fact, we recommend starting as soon as
possible,” he says. “The succession planning process is complex, and starting too late can result in missed opportunities, especially when it comes to wealth transfer strategies that can potentially reduce taxes.

 

 

 
Related articles:
 
Succession Planning: Tips for Selecting and Onboarding Your Successor
 
Seven Tips for Successful Business Succession Planning 
 
Please contact your Linscomb & Williams representative if you would like assistance with succession planning. Linscomb & Williams is a subsidiary of Cadence Bank.
 
This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.


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