Mark West is national vice president of business solutions at Principal®.
If you want to be entertained by a family business caught in the throes of a dysfunctional handoff between generations, watch Logan Roy and his heirs in HBO’s dark comedy, Succession.
But if you want to be better informed about how to handle your own seamless business succession—minus the drama—keep reading.
Succession rings true for real-world business owners at least in this sense: The most difficult decisions of a business succession tend to be emotional, not financial. You can crunch numbers and enlist expertise to help navigate finances. But you must look within to determine some of the tricky intangibles.
- Are you the type of business owner who can truly step away from the company you’ve built—a big part of your identity—and let somebody else run it?
- Do you have confidence in the business skills of one or more of your children or other heirs?
Such profound and subjective questions will loom over the entire path of your business succession. But other questions—including the following five—clarify practical steps you can take to make steady progress and give yourself more time to handle the emotional side of a succession plan.
1. How much money do you need in retirement?
Add up your 401(k) and other retirement accounts and investments, plus Social Security, and any other savings. Often that number is less than the retirement income you’ve determined you need for a comfortable lifestyle. That means you’ll draw some of your retirement income from the business.
If you’re giving the business to one of your heirs, you could serve as a consultant, or you could retain some of the real estate or other assets associated with the business to generate additional retirement income.
2. How invested are you in the ongoing success of the family business?
Maybe it’s practical: You don’t want to lose a big chunk of your income to a failed business and threaten your retirement security. Maybe it’s emotional: You have a legitimate stake in this legacy you’ve built, now led by a second (or perhaps third or fourth) generation of your family. Whatever the reason, a key component of a successful plan is balancing your income needs with the income needs of your successor(s) and the long-term success of the business you built.
3. How much time can you devote to the business succession?
Business successions are measured in years, not months. You may need to invest more time in mentoring your successor or helping them build up funds for a down payment to buy the business. Maybe you’ll work part-time and still draw a salary to ease yourself into retirement—both emotionally and financially. You could gradually transfer ownership shares as part of an extended succession.
The bottom line: Start a business plan for succession about a decade before the moment you officially hand over the reins.
4. Which allies can help with your succession plan?
Do you have established business relationships (such as with a trusted banker) to help in your succession? These strong community ties might help the next generation of ownership secure a loan (or a more favorable rate) as buyer.
A specific tactic such as a nonqualified deferred compensation plan could retain key employees beyond the succession so executive management continues to help drive the success of the business. An account also can be structured to vest and distribute to executives who themselves end up buying out the owners.
5. Can you focus on what’s equitable with a family business, not what’s equal?
Emotion inevitably colors business decisions with family involved. Proper planning helps keep the peace. For instance, if you’re giving your business to one child and it represents $2 million in value, don’t assume you should give $2 million apiece to your other children. While $2 million may be an equal figure, it’s not an equitable figure. The child with a $2 million business must assume all the risk and work necessary to capitalize on that value—and already may have invested years of equity as a leader in the business. That “gift” is much different than $2 million free and clear in cash.
What's next
- Have you considered an informal business valuation as a first step in succession planning? Your financial professional can request one for you from Principal. (See more in our business-owner FAQ.)
- Your financial professional also can request a family business planning report (example PDF) for a personalized look at 1) buy-sell and succession strategies, 2) retirement income, and 3) legacy and estate planning.
