Are business owners leaving the fate of their life's work to the courts? They may be doing exactly that if they don't have a strong business succession plan.
Advisors have a significant opportunity to quarterback the business succession planning process for their business-owner clients. A recent study for Nationwide conducted by Harris Poll revealed that three in five small business owners do not have a succession plan in place. To make matters worse, of those without a succession plan, 47 percent view a plan as unnecessary.
And to further raise the stakes, most states have intestate succession rules specifically designed to determine who receives a person's property if he or she dies without a plan. If a business owner doesn't create a plan for the business, the state will use its authority to determine what needs to occur. That means owners are leaving the fate of their life's work to the state if they don't have a strong plan in place, and the state's plan may not work for the deceased business owner, his or her loved ones or the company's customers and employees.
Starting the conversation
If a business doesn't have a strong succession plan, it should consider reviewing the company's corporate governance documents to ensure nothing has been forgotten. Often, terms are included in a business' operating agreement, partnership agreements or corporate bylaws that definitively deal with crisis events like death, disability and retirement. If that's the case, the business owner should take time to review the provisions governing their business and create a succession plan.
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On the other hand, if the business owner knows a plan exists, then the plan needs to be reviewed. Over time things change, ownership changes, business values change, purchase liabilities change, triggering events change, survivor income needs change, and so on. For a plan to be sufficient, the plan must meet the owner's needs — which is why a periodic review is always recommended.
Here are the three simple questions advisors can ask clients to get the conversation started:
In the event of your death, disability or retirement:
- Who will own your business?
- Who will run your business?
- Who will profit from your business?
Taking control of succession
Business succession is not a "one-and-done" process. The business faces critical risks as a result of transition events. If the business fails after the transition, it may have been the only source of income for the owners, owners' families and their employees. As a result, there needs to be a constant touchback to ensure the plan is still appropriate for key leaders and those impacted.
Most successful business people I know like to be in control of their business and its future success. The time to create a plan is not in the middle of a crisis, when you have zero leverage or run out of options. Nor is it smart to leave your business legacy up to the state.
It's in your clients' best interest to address this topic proactively, to help develop a plan that works for them, their employees and their customers.
Kirt Walker is president and chief operating officer of Nationwide Financial. Kirt joined the Nationwide family of companies in 1986 and held various life and property/casualty sales and underwriting positions. He is a graduate of Iowa State University, where he earned a Bachelor of Arts degree in management. Walker can be reached via LinkedIn.
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