Building Your Company’s Legacy Through Succession Planning
February 9, 2018 | A shared identity: Eastern Iowa unites to create Creative Corridor
You know how things work in terms of starting and running a successful business. You’ve hired the right people, offered a useful product or service and developed high-quality relationships with your customers and vendors. None of these things magically appeared out of thin air. You most likely followed a proven process, mixed in with your own creative problem solving, to build a successful business. The same adherence to process that applies to starting and running a successful business applies to a building a successful business succession plan and maintaining your legacy.
Research shows only approximately 30 percent of all family-owned businesses survive into the second generation, and only 12 percent will survive into the third generation. Surprisingly, only 3 percent of all family businesses operate at the fourth generation and beyond. Of the 70 percent of businesses that fail to transition successfully, 60 percent fail due to problems with communication and trust. Twenty-five percent fail due to a lack of preparation from the next generation. Fifteen percent fail from all other issues (e.g., poor tax or financial planning, legal advice, etc.).
We often hear owners say they want to transfer their businesses to third-party buyers when they first encounter the concept of succession planning in order to maximize their return. However, we’ve observed that in many circumstances, owners actually choose to transfer their businesses to employees or family members. Reasons for this decision include employees knowing the culture and values of the business, a desire to keep the business with people the owner knows and trusts, and employees’ inherent desire and commitment to grow the business.
If a third-party sale is the strategy that’ll allow you to accomplish all of your established goals, you’ll need to prepare yourself and your company well in advance of the sale. If keeping the business in the family or with key employees is most important to you, prepare yourself, your company and your team for an insider transfer. You may want to investigate creative methods to finance a sale, make sure your chosen successor can run the business without you and avoid conflicts among business-active and non-business-active children.
Planning for your exit maximizes value, minimizes risk and keeps you in control until you’ve achieved financial security. Starting with a trusted team of advisers can go a long way toward helping meet your goals, answer questions and prepare your company for a successful transition that will preserve your legacy.