The importance of a business succession plan

The importance of a business succession plan

– Chanelle Taylor (Director, Cornerstone Financial Planning)

Small to medium enterprises (SMEs) are the heartbeat of our economy and every successful small business has a direct and positive effect on South Africa’s economic future. Every business owner needs a well-structured, expertly formulated succession plan to secure the company’s wellbeing in the event of his or her untimely death. If you are a business owner and you are wondering what succession planning is and why it’s important – this article is for you.

At Cornerstone Financial Planning, we are experts at succession and estate planning and our main responsibility is to ensure that your business and legacy continues to thrive long after you have gone. With that attitude in mind, let’s explore the fundamentals of business succession planning.

What is a business succession plan?

Business succession planning refers to the use of estate planning strategies to ensure the survival of a business in the event of death or disablement. Succession planning is vitally important for all business owners, particularly family business owners.

There are few events in the life of a business that are as critical as replacing an owner. Replacing an owner is not only stressful on the successor, but also the employees, customers, suppliers, and other stakeholders in the business. Without a solid succession plan in place, you run a high risk that the business will fail due to a variety of reasons:

  • it may be lost to estate taxes
  • there isn’t enough liquidity to support the business during the owner transition
  • there is no formal arrangement to transfer business ownership or appoint a new manager
  • the family can’t agree on succession or;
  • those who stand to inherit the business are ill-equipped to own or manage it.

Types of succession plans

  • Buy-Sell Agreement

For family businesses with multiple owners, buy-sell agreements are perhaps the most effective form of protection for surviving family members. A buy-sell agreement provides certain events, such as death or disability, that will trigger a requirement that the remaining business owners purchase the interest of the departing owner. In conjunction with structuring and executing a buy-sell agreement, it is necessary to plan for payment of the departing owner’s interest. The most popular plan for payment involves the purchase of a life insurance policy.

  • Manager-Managed vs. Owner-Managed Businesses

Ideally, the process of business succession takes place gradually during the lifetime of the first-generation owner(s). Manager-managed businesses are those that are managed by an independent manager who does not necessarily have an ownership interest in the business. Owner-managed businesses are those that are managed by the owner(s).

A manager-managed succession structure allows for the resignation or replacement of the manager without effecting the ownership of the business, therefore reducing the potential instability caused by losing the owner and manager of the company in one fell swoop.

Therefore, as business owner, you could retain your position as manager while transferring your ownership interest to your successor directly or into a trust for the benefit of your children or spouse.

How do I choose my successor?

Often, we tend to trust those closest to us with our most valuable assets which is why for many small business owners, the default would be to appoint a family member or spouse as successor. This decision is sometimes to the detriment of the company, because the family members that were chosen might not have the required skills or experience to run the business and ensure that it continues to prosper. Equally, business owners should not assume that their children or spouses will want to take over the business. It is of course a different story when family members are already an integral part of the business’ management team and therefore are more likely be to be adequately prepared for succession.

In addition to the above, it’s imperative that any successor (family or not) should be aware of his or her position and that they are appropriately prepared, trained and educated to run the business if necessary.  Don’t let sentiment or nepotism cloud your judgement when making this decision, the health of your company and legacy depends on it. Our job and duty to you is to ask the hard questions and help you to make the right choice.

Succession planning is just as important as personal estate planning because of the many lives it effects. If you have no succession plan in place, you risk endangering the livelihood of your family, employees, co-owners, directors as well as suppliers and clients. If you need assistance with business succession planning, be sure to contact Cornerstone Financial Planning for expert advice and guidance.

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