Successfully Building Your Business Succession Plan

With nearly 70 percent of family-owned businesses failing to reach a second generation, owners must develop a plan for how the business will be managed after they retire.

by Marc Newman, CPA

Whether your business was passed down through the generations or you built it from the ground up, over the years you've worked hard to make it the success that it is. But did you know that without a solid succession plan in place, your family business could be in jeopardy? According to studies, nearly 70 percent of family-owned businesses fail to reach the second generation, and only 13 percent continue to the third generation.

While it may sound drastic, business succession planning doesn't have to be. But like estate or retirement planning, it's something that most contractors - no matter how financially or professionally savvy they are - would rather put off indefinitely.

The following article outlines tips for formulating your business succession plan:

• Plan for the Unexpected. Before you embark on your long-term succession planning, be sure to have a contingency plan in place in case of a short-term emergency. Identify who in the company is currently most capable to run the business. Don't forget to consider how other members of your family and company will react to your contingency replacement taking over the reins. Once you've made your contingency decisions, fully document them and communicate your plan to your company on a regular basis.

• Create a Game Plan. What do you want to do with the business when you retire? How much will you need from the business when you do retire? Since most construction businesses are closely held, family-run operations, do you want your business to continue as a lasting legacy? Should you sell the business to an outsider or let the children take over? If you don't know where your construction company is headed, making long-term decisions becomes even more difficult. This is why it's important to set your goals and develop strategies to help achieve those goals. Some succession related strategies include buy-sell agreements, profit-sharing plans and employment agreements.

• Look at Leadership. When you've run the show for so long, it's often hard to recognize that management and ownership are not necessarily the same things. In fact, equal sharing of the ownership and management of the business by all your successors can be a sure formula for failure. And if the business fails, all of your family members will feel the loss. Business owners are accountable for two key roles: Setting policy and recruiting competent management. Sometimes, fulfilling this second role means hiring outside the family for some, or occasionally all, of the management skills necessary for your firm's future success.

  In making succession decisions, take a realistic look at your family and consider their desires and abilities to successfully maintain the firm. For example, what if your oldest son wants to be an engineer rather than carry on as your company's CEO?

• Avoid Family Pitfalls. Some of the most challenging succession planning situations arise when it comes to deciding how to distribute the business among family members. A critical mistake parent/owners often make is breaking up the business and giving children unequal pieces. In these cases, one child may end up with a business where they are competing for customers with their sibling; or one child's business may need to split overhead costs with the other. The potential financial impact of unequal ownership, coupled with the natural competitiveness of siblings, can spell disaster for a family business if the current owners are not careful.

• Consider Management Alternatives. You must make the tough calls as to which family members, if any, can continue your business' success. However well intentioned, sometimes the business and individuals are better served by deciding to sell to a third party. In other cases, it may be best for successor family members to delegate all management responsibilities and to enjoy the rewards of investors. If the transitions you envision for your company appear to damage family relationships, you may want to consider other ownership and management alternatives.

• Consult Your Advisors. No one knows your business - and your goals - better than you do. But often long-standing family issues, unresolved grudges and other personal matters stand in the way of making intelligent, objective decisions about your company's future. Turning to a trusted advisor who specializes in family business succession planning will provide you with the professional, unbiased tools you need to act in the best interests of your family, your employees and your customers.
  

Marc Newman, CPA, is a partner at Anchin, Block & Anchin LLP in New York, N.Y. and co-chairman of the firm's Construction Services Group..