What Happens If You Do Not Have a Succession Plan for Your Business

Planning for your business’ succession is incredibly important. A business deserves as much attention in figuring out how to pass it on as it did figuring out how to get it up and running, or keeping it running for that matter. If you do not take the time to get a succession plan in place, you need to be prepared for the consequences.

• You have set the business up to fail. The statistics on the generational survival of a small business are grim. 70% of closely-held businesses do not make it through the second generation of ownership. Less than 10% survive into the third generation. Thus the motto: shirt sleeves to shirt sleeves in three generations. Most owners have a personal attachment to their business which goes beyond its financial success. They want to see their hard work and legacy continue into the future. Your legacy will be short-lived if you have not given the business the best chance of beating the above odds by forming a succession plan.
• You have jeopardized your family’s financial security. Your business is an investment, one that oftentimes is meant to care for your family even after you are gone. In one form or another, business owners usually imagine their businesses providing income into the future. Perhaps you intend your spouse to receive dividend distributions from the business or a series of installment payments from its sale. Or you intend your children, as the next set of owners, to draw a manageable salary from the business to support themselves. All of this goes by the wayside if the business fails after it leaves your hands. At that point, and in the best case scenario, the most your family will be able to extract from the business is its liquidation value, which is often only a fraction of what the business was worth when it was healthy and running.
• You leave your employees in a lurch. An owner and his or her family are not the only ones to suffer because of a shoddy succession plan. Closely-held businesses are unique in a way massive corporations are not. Most owners feel some responsibility and loyalty to their employees. Even though the employees might not inherit the business, they are still dependent on it to support themselves. This is especially true for long-serving employees. If the business fails, then that employee has lost his or means of support as has that employee’s family. The employees are often forgotten about when we talk about failed business succession, even though losing your source of income is more devastating then losing your inheritance.
• The community suffers. The tremors of a failed family business affect the entire community. Employees suffer and families suffer. Revenue that the business brought to the area will be lost. Customers or vendors who rely on the business will be hurt. The magnitude of the negative impact increases with the size and prominence of the business.

Feel free to contact Goosmann Trust Law Counsel at (712) 226-4000 if you have any questions. Also, you can continue to follow our Estate Planning Lawyer on Your Side blog here.