You’ve built a great business. You’re in the prime of your life. You don’t feel any pressure to start worrying about succession planning. What’s the hurry?
Unfortunately, tomorrow is promised to no man.
For years, I went to a music retailer in Staten Island. It was my go-to place to check out the latest gear. The store had a who’s who list of clients and close to 1,000 beautiful instruments on display, just waiting for me to start strumming. One day, I walked in, and the walls were bare. The children informed me that their father, the owner, had died suddenly. There was no formal succession plan in place, and they were forced to liquidate.
This could have been avoided. Many owners are so busy taking care of the day-to-day business, they don’t take care of their own long-term financial health. Creating an effective succession strategy takes time. Most professionals recommend a minimum of 10 years to design and implement a strategy. I say: Build your business to sell it. It’s not a matter of if it will occur; it’s a matter of when.
Think about it this way. If your goal is to one day transfer ownership to your children or key employees, training is necessary. Mentoring and preparing your successor(s) takes time. It can’t happen successfully six months before you want to sell. And if your goal is to sell to a third party, you’d better make sure your business looks shiny from the outside and the inside, with accurate financial records, projections and supporting documentation.
Then there’s the need to have a succession-planning team in place to help you implement your strategy. As a financial planner, I stand in awe of the sheer number of moving parts involved in succession planning. It requires more than one professional to get the job done right. In fact, it requires an interdisciplinary team, all coordinated by a single professional on your behalf.
Here’s a breakdown of the team:
Financial planner. It doesn’t make much sense to start succession planning if you don’t know your own personal income needs to maintain your quality of life. Financial planning is about organizing key aspects of your financial life and understanding what’s aligned or not aligned with your personal values—all necessary to implement sound financial decisions. As a financial planner, I’m admittedly a bit bias here: I believe a financial planner is often the most effective quarterback for coordinating all the members of your succession team.
Accountant. Accurate financial statements are key. An experienced accountant will not only provide the usual accounting and taxation work but also assist in a non-formal business valuation, and operational consulting to help identify the strengths and weaknesses of your business.
Valuations expert. If there’s a risk of having the valuation contested, a formal business valuation expert is key. Litigation support, economic damages and expert witness services are highly specialized fields. If you believe a family member or key manager will disagree with the valuation, I would strongly recommended hiring the right valuation and litigation support.
Attorney. Business succession-planning attorneys provide the tools to implement a succession plan. Because selling a business integrates business and personal components, the succession-planning attorney must be proficient in a variety of skill sets, including manager buyouts, family gifting, generational transfers, family estate planning, tax, and qualified and non-qualified retirement strategies.
Sell-side advisor. Taking on all of the responsibility of selling what could be your most important asset may not be in your best interest. In the end, you are the client, and you will determine whether an offer is acceptable.
Psychologist. Passing the baton can be as influenced by emotion as it is by logic. Business owners often have their identities wrapped up in their work, and as Neil Sedaka sings, “Breaking up is hard to do.” Your business will no longer be the center of your life. You may want to see a counselor as you redefine your priorities.
So what are you waiting for? Start building your succession team. You’ll be glad you did.
Jaimie Blackman, president of BH Wealth Management and Financial Planner, created Sound Financial Decisions to help guide music retailers through the complexities of succession planning. He can be reached at firstname.lastname@example.org.