Three key steps to a succession plan

by Robyn Staggs (robyn.staggs@baml.com) 155 views 

Here in Northwest Arkansas, we are fortunate to have a thriving economy, thanks in large part to businesses of all sizes investing in our community.

I know from working closely with business owners that an enormous amount of time and energy is spent building their companies — that’s why ensuring its longevity and legacy should be a priority. However, according to a recent Bank of America study, less than one in three Baby Boomer business owners has an exit strategy.

Creating a succession plan is about protecting the future of a business and ensuring there are strategies in place for the business to continue to realize its value for all stakeholders after the founder exits. Rather than reacting to circumstances, such as retirement or sudden disability, business owners in Northwest Arkansas can make proactive decisions with a detailed transition plan, whether they’re planning to leave their business to a family member, sell the business or liquidate.

There are three key factors to an effective succession plan:
• A capable successor
For those business owners planning to leave or sell the business to a family member or partner, it’s important to identify a successor who has the right leadership skills and business acumen to ensure the future success of the business. It’s important to note that while 79% of business owners want their family to keep the business, only 30% of family businesses successfully pass to the next generation.

Identifying a successor isn’t as important for business owners who plan to sell their business, though they should maximize the value of the business by engaging a wide range of potential buyers. Liquidating the business is another option, though this may result in overall financial loss as buyers will often look to pay less-than-cost for inventory and equipment.

• A detailed plan of transition
A detailed transition plan should map out short- and long-term goals and engage a team of advisers who can help to ensure a smooth transition. This should be a diverse group who can provide specialized counsel, including corporate attorneys and an estate lawyer. Many business owners opt to designate their personal financial adviser as a point person to coordinate the team’s efforts while clarifying the overlap between business finances and family wealth.

• An estate plan
Investigating the best ways to help your estate pay estate taxes and other associated costs is an important dimension of succession planning because the liquidity of the business will determine whether it can help to offset estate taxes and other expenses. Gifting wealth, buying life insurance, refinancing business loans or moving liquid assets to new accounts can greatly simplify matters for successors, and optimizing these strategies requires in-depth planning.

In entering the process of succession planning, we encourage business owners to consider what kind of legacy they want to leave. What do they hope to accomplish as a business owner and on a personal level?

Entrepreneurs as a group rank consistently among the most generous segments of the population. Philanthropy can provide a unique opportunity to enrich the lives of many people, and aspirations to do so should be considered in succession planning.

Finally, succession planning doesn’t stop once a plan is developed. Business owners must review plans on a regular basis and reevaluate as the business grows, owners’ priorities change and aspirations for their legacy continue to evolve over time.
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Editor’s note: Robyn Staggs is a senior relationship manager for Global Commercial Banking at Bank of America Merrill Lynch in Northwest Arkansas. The opinions expressed are those of the author.

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