Business Succession Planning: Identifying the Next in Line
Succession planning makes a business stronger. A succession plan is key to a company’s longevity and bottom line.
Having an owner leave a business is risky and stressful. All eyes turn towards the outgoing leader and the preparation he or she makes to ensure that the company continues to prosper without him or her. Also, there are cases when a leader is forced to leave a company due to illness, disability, and death. Without a succession plan, a company that experiences this has a high possibility of finding itself on a plan to fail.
The following data proves our train of thought. Statistics show that eighty to ninety percent of US businesses are family owned. However less than one third of them survive the second generation, and less than ten percent survive the third generation. Also, a 2012 CIBC World Markets Inc. report says that in Canada approximately half of the small business owners are expected to retire. But not all of enterprises have a succession plan. Only ten percent of owners have a formal written plan, while thirty-eight percent have an informal non-written plan, and fifty percent have no succession plan at all.
Identifying a Successor
A business owner has two options in business succession. First, he can identify a successor from a family member, child, or individual. And in cases where no successor is identified, the sale of shares and corporate assets becomes the option. Life insurance opportunities are present for both scenarios to ensure funding at the date it is needed.
Debt funding, tax liabilities, estate equalization, and other estate costs are also important considerations during planning for business succession.
Below is the outline of options for business succession:
No successor is identified
- Implications. The owner has no plans to pass on the business to a family member.
- Next steps.The business owner can sell personal shares, corporate shares, and corporate assets to an outside party. He may also decided to invest the after-tax proceeds of the sale in the corporation or distribute these to shareholders.
A successor in mind
- Implications. The business owner has identified a successor and can transfer ownership while he is alive or when he has passed on.
- Transfer to successor during life. The business owner must decide how the ownership will be transferred. Will it be a gift to the successor, a sale at fair market value, or through estate freeze? An estate freeze locks in the value of the owner’s share, allowing the successor to enter with minimal capital contribution.
- Transfer to successor at death. He can transfer ownership to the successor via gift or sale at fair market price.