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Thinking ahead: Why you need a business succession plan

Family owned businesses form the backbone of our economy. They create 57 percent of the nation’s gross domestic product and 75 percent of all new jobs, and in California they employ 7 million people. That said, their longterm viability is anything but guaranteed. Only one in three family businesses continues successfully into the second generation and only one out of eight survives into the third. The reason these transitions usually fail is simple: Business owners forget to create succession plans or they put it off until it’s too late.

A generational change in a family business is a complex issue where emotional as well as practical, financial and legal aspects come into play, but a good business succession plan can make things easier. What might a good plan look like? While every company is, of course, different, the ground rules include early action with the professional help of an attorney, clear communication, consideration of the vested interests of loyal employees and officers, as well as prioritization of company interests over sentiments.

Early action is key. If you run a business or are in the process of setting up a company, I recommend you come up with a succession plan now. By doing so, you can mitigate longterm tax liability as well as prepare your business for unforeseen events. Even if you are still young and nowhere near retirement age, accidents can always happen. With a succession plan that includes contingency management in case you suddenly die or fall ill, you can ensure that your family is not left scrambling to make the right decisions in an already stressful time.

Talking of family: Most business owners — and you might be among them — like to imagine how they will one day pass on what they have built to a son or a daughter. They envision how he or she will run the company diligently and enthusiastically, how the business will continue to thrive and grow. But who is to say that the children will want to take over the business? What if they don’t have what it takes to run a company successfully? I suggest that you weigh carefully and as unemotionally as possible what’s best for your business. If you conclude that someone other than a family member might serve the company better as the new leader, I advise you to communicate this strategy to everyone involved as early as possible. Open communication will not only help manage expectations and stave off possible disappointment, it will ensure that your business can transition to new leadership smoothly and stay successful.

by Kevin J. Moore