How to Create Value and Mitigate Risk Through a Business Succession Plan
At Third Road Management we have the honor of working with businesses and non-profits across a spectrum of industries, ownership structures, tenure and financial status. Through our experience we have gathered some wisdom that can hopefully be helpful to business leaders outside of our current network of clients. This is our venue to provide some of that wisdom.
The topic we’d like to discuss today is establishing a business succession plan. Essentially a business succession plan is a pre-mapped plan for how your business should continue operating in the event of your retirement, incapacitation or death.
Here are three reasons why creating a business succession plan is important:
Value Creation: One of the best things that you can do to create value in your business is to build up your leadership team in such a way that the business can operate without you. Too often business owners are the #1 salesperson, the person that makes every decision, the HR department, etc. In addition to providing you with a healthier work-life balance, building out a leadership team will signal value to potential acquisition suitors they won’t need you for them to be successful. It sounds counterintuitive, but the less you are needed, the more your business is likely worth.
Protecting Your Family: In many cases your family members know absolutely nothing about running your business. Therefore, it would seem like a bad idea to hand the business over to them with no leadership team in place in the unlikely event of your incapacitation or death, right? To be clear, by incapacitation we’re talking about everything and anything that can happen that would leave you away from your business for an extended period of time, and there are lots of those scenarios (cancer treatment, car accident, etc.). The last thing you would want is to see the business you have spent your life building dwindle, diminish in value and stop providing critical cash flow to your family because you aren’t there to lead it and nobody on your team is capable and/or has been empowered to.
Taxes: There can be some rather serious tax ramifications to not having an estate plan in place, which should be done or cross referenced in the process of creating a business succession plan. We are not the experts on legal or tax matters, but we know enough from working with these experts that negative tax ramifications a very compelling reason for you to potentially pursue building a plan.
To be clear, a business succession plan could be to keep the business operating to maintain cash flow to the family, or it could provide needed stability until a business can be sold. Business purchasers don’t want to catch a falling knife.
For these three reasons alone we imagine you can see why this is a good idea. From here, we’d like to leave you with some practical next steps if this is something you would like to take action on:
- Create a 1.0 version of your plan. We say a 1.0 plan because there might be questions and ideas that come up later that you may not think of.
- Identify the gaps in your plan. Don’t freak out if you don’t have the right leadership in place right now. That is actually something that Third Road Management can help out with now, temporarily or longer term. But, it is important for you to know what the gaps are.
- Talk with a wealth management firm and/or attorney about your estate plan and business continuity plan. Everything needs to be documented to provide clarity, legal standing and peace of mind. In addition, they will likely bring good ideas like key man life insurance policies, buy-sell agreements, etc. to you during this process. If you need a recommendation on any wealth mangers or attorneys, give us a shout.
- Execute the plan…including building out your leadership team.
- Talk to your family about the plan so that there is no room for confusion.
If any of this sounds daunting and you don’t know where to start, give us a call and we would be happy to help. This is not an insurmountable hill and part of the normal value we provide to our clients here at Third Road Management. It will require some investment on your part, but in the end you and your family will be incredibly grateful that you made it.