Small and family businesses take note!
Business succession planning may not be high on your agenda, but retirement is a fact of life for everyone.
Some look forward to it while others dread the thought. Even if you feel able to continue to work forever it is seldom in the interests of an individual (or their related business) to continue working indefinitely.
In a small or family business, succession is an important consideration and it is imperative that plans and processes are put in place to effectively conclude the transfer of either ownership or management from one party to another.
Ideally you expect this transfer to take place in an orderly manner, and that you will control when it will happen. However, what if a tragedy befalls a key employee? Is your business sufficiently prepared for this eventuality? Unfortunately, I have seen many instances where inadequate business succession planning has led to the enterprise being placed in jeopardy.
The good news is that there are solutions to limit the impact of such a scenario. The bad news is that without some initial planning, these solutions will not be as effective as they could be.
Draw up a shareholders’ agreement
The first step is to ensure that a shareholders’ agreement is put in place between the owners of the business. Even if the owners are family members, it is still a very good idea to have a detailed agreement in place.
When circumstances change our expectations can also rapidly change. Being in business with family or friends is not proof against misunderstanding or disagreement. Having a firm agreement in place will help determine the rights and responsibilities of each party.
Shareholders’ agreement contents
A shareholders agreement should stipulate:
- the percentage shareholding of each equity partner
- the roles and responsibilities of each partner
- any right of first refusal on share issues or transfers
Effectively, such an agreement outlines the rights of the remaining shareholders when one shareholder wishes to sell all, or a portion of, their shares. Agreeing this process up front can facilitate a smooth transition from an exiting shareholder to a new shareholder. Similarly, when issuing new shares in a business, it is important that agreement is reached on whether existing shareholders have first option on purchasing these new shares. It is important to agree options and terms on purchasing the shares in the business upon death or disability of one of the shareholders.
Key man insurance
What happens when one of your key shareholders, for example one who occupies an executive position, dies or is permanently incapacitated? The answer to this is key in business succession planning as it can have a significant effect on the smooth running of your business and even its continued existence.
To avoid complications it may be beneficial to take out key man insurance against such individuals. This provides a payout to the business in the event of death or permanent incapacity of the insured individual, which can be used to headhunt a new manager or to provide funding to the shareholders if they decide to dissolve the business.
How to ensure a smooth business succession planning transition
- Identify key individuals with the necessary skills and experience to drive the business forward once the present management moves on.
- Make them aware of their role in the organisation’s business succession plan.
- Give them access to the decision-making structures.
- Share knowledge beyond a handful of key individuals.
- Ensure that the employees are aware of who the new management is likely to be, so that the succession is seamless.
- Ensure that the next generation of management is exposed to your key customers if they are to be involved in maintaining customer relationships.
For an organisation to reach its prime, it may be necessary to break away from the founders. Knowing when this point arrives is key to the success of an organisation.
By creating an agreement that covers the transfer of ownership from one party to the next, by ensuring provisions are in place for the untimely loss of a key individual, by developing and communicating a long-term succession plan, and by knowing when to finally step aside, you can create long-term stability for your company.
Selecting qualified advisors, such as an accountant, attorney, or financial planner, can help assure that your plan legally, profitably, and affordably considers your needs and objectives.
If you want to ensure your business continues into the future – without compromising your retirement needs – business succession planning is important.
Debbie Netto-Jonker CFP® is the founder of Netto Invest and was Financial Planner of the Year in 2001
