Seven Steps for Succession.

ONE OF THE CHIEF CONCERNS FACING OWNers of family or closely held businesses is how to effect an orderly and affordable, transfer of the business to the next generation or to a key employee. It's an objective that, given adequate time and proper planning, can be accomplished easily and often profitably. But as most business owners know, there is seldom sufficient time to accomplish simple day-to-day tasks, much less plan for something that won't happen -- or so most of us hope -- for many years. But how and when to address this objective is a question that needs to be answered, and it needs to be answered before it becomes a problem.

Failure to plan for orderly business succession can result in both monetary losses, and even loss of the business itself. Estate taxes alone can claim 18% to 55% of a taxable estate, frequently resulting in businesses having to liquidate or take on tremendous amounts of debt just to stay afloat following the death of an owner. For business owners who've done all that they could over the years to avoid or pay off a debt situation, the prospect of going back into debt to pay taxes is not a pleasant one.

Thus, one of the most important aspects of business succession planning is working out the financial pitfalls following the death of the business owner, answering questions like:

Where will the money come from to pay taxes?

Is the business a partnership?

Where will the money come from to buy out the deceased partners' share?

Since it isn't uncommon following the death of an owner or partner for clients to take their business elsewhere, how do you make sure there will be adequate capital to carry the business through what could be a slow transitional period?

Many of these questions can be answered through the proper use of such funding vehicles as life insurance, annuities, and disability insurance and often at little or no net cost to the business. But the time to work these things out is before the situation arises, not afterward.

Don't think business succession planning ends with an estate plan and life insurance firmly in place. Protecting the financial aspect of things is, in fact, actually just the beginning. Business succession planning must also include a plan for transferring the trust, respect and goodwill that's been built up throughout the years. If the recently departed owner was a large part of the reason clients were willing to do business with the firm, these clients need to be reassured that they will continue to receive the same quality attention and service they are accustomed to receiving from the present owner.

One of the best ways to accomplish this is to begin transferring such loyalty while the owner is still around. This can be done by introducing younger associates to existing clients now, and by shifting some of the responsibilities associated with these accounts over to them. Get the clients comfortable doing business with the "next generation" of ownership, and let them see that there will be no change in service. Or better yet, let them see an improvement. Teach younger associates about the "power of doing the unnecessary." In this case the "doing the unnecessary" can mean anything from sending clients notes to stopping by or calling -- not to sell something -- but just to keep in touch.

It can mean clipping an article out of the paper that may be of interest to the client or related to his or her business and sending it to him or her. Essentially, it's letting the client know that he or she is important, and that you value their business. The result will be that little by little, the "owners to be" will earn a client's trust and confidence.

Another aspect of successful business continuation is earning the trust and confidence of not only the business' clients, but of its employees. This means paying attention to the details. Is the work environment pleasant? Do people have the support and technology they need? Do they feel appreciated and a part of things? In most industries, there are usually plenty of competitors out there interested in finding new quality associates. Like clients, employees need to be reassured that they are important to the company. Earning the trust and confidence of a company's employees is just as important as the trust and confidence earned from a client.

So where -- and when -- should business planning begin? The start-up phase is obviously too early. But too often, many business owners wait until the last minute when important options, including the potential uninsurability of a principal or key employee, have closed. There are generally seven stages to setting up a successful business succession plan:

1. Survival: Once the business has survived the start-up stage, the owner should begin considering a business succession plan, regardless of his or her age.

2. Commitment: The owner must be committed to the concept that the business must continue, in order to create opportunity for those to come. This commitment must be communicated clearly, extensively, and often.

3. Recruitment: A company cannot survive unless it is staffed with the best people. Recruiting good people will always pay dividends, and it is a key area of importance in succession planning.

4. Development: Investing time in developing family members, key employees and management team members and allowing them to exercise authority and control will be vital to your success. Good managers are seldom born, but they can often be cultivated.

5. Selection: Having developed a transition plan and recruited the right people, selecting a successor or successors becomes easier. By empowering a broad range of key people, tile selection process is simplified and the owners options are enhanced.

6. Announcement: Once a succession plan is in place, the owner should communicate his or her future plans. This communication gives key management people and/or family successors a clear understanding of the path to the future, as well as any role they may play in that path. It also allows them to begin setting future goals and objectives for themselves.

7. Implementation: In implementing the succession plan, the owner must be ready to step aside and allow the successor(s) to take over. The owner must be prepared to take on new challenges in retirement, knowing that his or her financial future is secure.

Finally, while not one of the seven stages, selecting qualified advisors such as a CPA, attorney, insurance agent and financial planner can help assure that your plan takes into account your needs and objectives, and does so legally, profitably and affordably. If seeing your business continue into the future -- without compromising your own retirement needs -- is important to you, this last step may be the most important of all.