When it comes to any business, wishing upon a star won’t ensure its future. Historically, remember the case of Michael Eisner (past chairman and CEO of The Walt Disney Company). First, Eisner’s “second-in-command,” Frank Wells, died in a helicopter accident in Nevada. Then, four months later, Eisner underwent quadruple bypass surgery. Disney, a multi-billion dollar entertainment empire, was suddenly facing an uncertain future caused by the potential loss of two key executives. And as bewildering as it sounds, little advance planning had taken place to assure the continuous and smooth running of the Disney company.
If a large company such as Disney could face problems in its succession planning, doesn’t that underscore the importance that today’s small business should also place on having a succession plan? What would happen to a small business if the owner became disabled or died unexpectedly? What would happen to the owner’s family? What are some “safeguards” that can be put into place?
Now is the Time to Plan
It makes financial sense for a business owner to avoid jeopardizing the stability of his or her business. For a succession plan to succeed, an owner needs to examine immediate, intermediate, and long-term goals. A plan should be based on financial forecasts and budgets that are adaptive to changing conditions of both the industry and the economy. In addition, an integral part of any succession plan is predetermining successorship.
Grooming a successor can often require as much as ten years to acquaint him or her with the intricacies of a company. It is also important that a selected replacement can step into the owner’s shoes and maintain the company’s momentum.
If an owner’s intent is to keep the business within his or her family, then information needs to be gathered objectively about the needs and interests of his or her family, the needs of the business, and the qualifications of any potential successors. In addition, open communication with family members is of critical importance. Such discussions should revolve around who will continue participating in the business and in what capacity. Also, a determination should be made about what nonparticipating family members should receive, as well as how working members should be compensated.
Regardless of an owner’s ultimate intentions for the succession of a business, it is important to outline some details in the event a need for succession planning makes an untimely arrival. Thus, a business survival “checklist” should include the following items:
- A thorough job description of each position, including details regarding areas of responsibility and delegation of duties.
- A management succession plan.
- An estate plan assuring the availability of cash to meet the demands of federal and state estate
- A list of potential successors to ownership, taking every candidate’s job experience and academic background into consideration.
- A mechanism to ensure extensive on-the-job training for the successor(s).
A succession plan may also include a buy-sell agreement funded by life insurance. More than likely, a successor may not have the cash, or the ability, to borrow at the time of successorship. Under such an agreement, the death benefit proceeds of the life insurance can be used to provide the cash necessary for a successor to purchase an owner’s share of stock in the event of his or her untimely death.
In addition, it may be prudent to explore how an owner’s unexpected disability can affect not only his or her plans for successorship, but his or her overall financial well being. Under a disability buyout arrangement, a disability buyout policy provides a successor with cash to purchase shares in the event of the owner’s untimely disability.
A Few Final Words
Timing is everything. As a result, it is prudent for today’s small business owner to consult with insurance, legal, and tax professionals to devise a plan of action that will provide security for his or her business and family. In addition, it is equally important that succession plans are periodically reviewed to assure the plan is consistent with changing circumstances. With proper planning, an owner’s objectives for business succession and securing future family finances can be accomplished.