How Do I...Make a Succession Plan?
A succession plan is an organized process that goes into effect should a business owner become disabled, retire or die unexpectedly.
It is intended to allow a business to continue operations with the least possible disruption, but many business owners are not implementing these plans. A recent PNC Bank survey shows that 77 percent of business owners have a will, but only 33 percent have a succession plan.
Irene Estrada, a vice president and senior wealth planner at PNC, who works with small businesses on these types of issues, said new start-ups generally don't need a succession plan, but any business owner should consider making one as their firm starts to accrue value.
She added that many business owners think that a will is similar to a succession plan, but it is not.
Estrada recommends that business owners talk to a professional adviser about how to create a succession plan and then see an attorney for help drafting the actual document. The kind of plan you create depends on your firm. For a partnership, it might be a buy/sell agreement that sets the value of the business so that a partner can buy out the interests of the business. For a corporation, it might take the form of a shareholders' agreement.
In setting up a plan, she said business owners should think about what they want to happen to their business should something happen to them, including who they would want to take over for them and whether that's a spouse, child or non-family member.
If the heir to the business is not a family member, it's often good practice to set up a mechanism to buy out the rest of the family members if that person is not comfortable running the business with the rest of the family.
"It's important to set up an agreement among the partners so that they're all on the same page," said Estrada, who added that insurance plays a significant role in a lot of plans. For example, insurance money can give companies some liquidity, especially valuable to those firms that don't have fat bank accounts.
It's usually best to set up the succession plan and then set up the insurance, according to Estrada.
In Estrada's experience working with small family firms, she said that people typically do want to have family members involved and some family-owned businesses see succession planning as a good way to show their kids what they do at work.
"We generally don't see the business owners looking to groom their child to take over, but rather they want them to start seeing what the business is and how it's run," she said.
Some of her clients have hired their children as summer interns to expose them to the business, but she said: "We often find that the kids just aren't that interested and they just want to inherit it. That's definitely a concern for business owners."
Estrada recommends that a succession plan be updated every two to three years or whenever there's a big change in the business or the owner's personal life such as a marriage or divorce.
"Every couple of years you should check it, especially since there's often changes in tax law or you may realize that your child isn't interested in your business," she said. "Plus, I often see people who don't have a succession plan and have a very old will -- maybe they made it when they had their first child but they never moved it forward as they accrued wealth."
What will a succession plan cost you? That depends on the type of plan, whether or not you use a financial planner and the attorneys' fees, Estrada said.
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