The importance of the succession plan

You’ve built a successful family business, accumulated a nice retirement nest egg and put together a comprehensive estate plan. But if you don’t have a workable succession plan, there’s likely to be a big hole in your planning.

“A lot of people confuse succession planning with estate planning,” says Edwin Hoover, a family business advisor based in the Chicago area.

The two processes, however, are very different. The estate plan is all about an individual deciding who gets what when he or she dies. The succession plan is all about the survival of the business. That makes succession planning a group process since all parties need to be at the table.

According to the Family Firm Institute, only about a third of family businesses successfully navigate the transition to the next generation. The reason: poor planning, unresolved family conflicts or the lack of estate preparation, says Hoover.

Hoover recommends starting 10 years in advance of any expected change in management, providing ample time for the family, business, new management and outgoing owner to work together in crafting a successful transition.    

Good communication is a critical part of the succession planning process. It is the funding, however, that provides the glue needed to make a succession plan work. Life insurance is commonly used to make sure that kids in the business aren’t favored over those who choose other professions. Insurance can also fund buy-sell agreements in case of death or disability and may supplement retirement income.

Too often, owners never get around to funding their succession plans. Others don’t pay enough attention to the funding details, while still others put their plans in place and forget to update them as things change. The result: family members and business partners may find they have insufficient financial resources to actually implement the plan.

-Todd Sivak is director of wealth management at Summit Street Wealth Management in Oconomowoc.

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