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MindShare: Protect Your Life’s Work and Legacy

By William Wolfe, Senior Vice President, Financial Advisor, Fragasso Financial Advisors

William WolfeThe benefits of owning your own business can be endless. Financial rewards are a primary benefit but so is the independence, flexibility and control of running your own company. While extremely rewarding, being a business owner is challenging work. Business owners can be so focused on the day-to-day activities involved with sustaining a successful business that they neglect planning for the future of their company. Creating an individualized, robust, well-orchestrated succession plan is imperative for a company to provide stability and continuity in a time of crisis such as death, disability, or a transition, such as retirement. Failing to plan well in advance can be costly and detrimental, yet this planning continues to be commonly neglected. Most surveys indicate that 60% of small businesses do not have an exit plan in place.

Reasons Owners Avoid Succession Planning

1. They are unsure where to begin.

2. They believe they will never leave their business or retire.

3. They do not know what professionals can help create their plan.

4. They feel they have no time to develop the plan.

5. They feel they have plenty of time to worry about succession planning later.

Not only is succession planning imperative, but it also needs to occur as early as possible. Successfully transitioning a business is directly correlated to how early you begin planning. According to one research study, business owners who begin planning for their succession ten years ahead of time had an 85% success rate while owners planning two years or less resulted in only a 25% success rate.1 A main reason for this disparity is that the longer you wait to create your plan, the fewer options you have.

Benefits of Succession Planning

There are many benefits for companies and owners who plan early, properly and strategically for the orderly transition of management and ownership. They include but are not limited to:

• Maximizing the survival and value of the business: Whether you plan to sell to a family member, employee, business partner or third party, a comprehensive plan can assist in obtaining the most advantageous value for your business.

• Establish financial security and maintain your lifestyle in retirement: It is important for the business owner to determine their income needs and assets needed to live comfortably in retirement. This must be factored into the succession plan.

• Provide for family members: In the event of disability or premature death, a succession plan can help ensure that family members have access to much-needed liquidity.

• Minimize taxes and efficiently transfer wealth: Estate taxes and other costs can be extensive and can ultimately cause businesses to fail. Beneficiaries may be forced into a too-quick sale to pay those taxes.

• Ability to retain control: Business owners have spent their lifetime making their own decisions to grow their company; a plan allows them to control the process and outcome.

Key Steps to a Good Succession Plan

1. Define your succession goals.

The owner needs to pinpoint their individual needs, their family’s needs, and the needs of the ongoing business before they can determine the succession tools needed to meet those requirements.

2. Determine options for future leadership.

The future leaders could be family, a business partner, a third-party buyout, or employees of the business.

3. Obtain a valuation for your business by a certified professional.

There are three main valuation methods. One method could be utilized, or it can be a combination of these approaches:

i. Income-based approach: This approach utilizes a discount rate to calculate the present value of future cash flows. There are several types of discount rates that can be used.

ii. Market-based approach: This approach estimates the value of the business by comparing the market price of comparable businesses.

iii. Asset-based (cost) approach:  Estimates the business’s value by calculating the company’s assets minus its liabilities.

4. Finalize who will be the successor.

Once you have decided on a successor you want to also determine what support and training this successor may need.

5. Design the succession plan.

Outline the succession details, organizational structure and timeline. Depending on whom ownership will be transferred to will ultimately determine the vehicles needed to ensure a smooth transition. These vehicles may include life insurance, family trusts, buy-sell agreements, or an employee stock ownership plan (ESOP), to name a few.

6. Communicate the plan.

To be effective it is important to share the details with those impacted so they can clearly understand their roles with respect to the company. The more communication the better.

7. Review the plan on a regular basis.

Key employees may leave, family members could change their mind, or the owners’ goals and plans may change.

Every business owner will eventually exit their business. Whether it be for retirement, disability, or death. There are many steps and decisions that need to be made so that your tireless work to build your business remains your legacy. Having your professional “board of directors” (attorney, CPA, financial advisor, etc.) involved every step of the way is critical.

The team at Fragasso Financial Advisors can be the coordinator of these professionals to help make sure not only your business financial planning is taken care of, but also your individual financial planning to create a cohesive solution that incorporates all areas of your financial picture. You can reach out to me directly or visit our website at

1. (Blueprint for Business, Family Business Succession Planning, 2009)

Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.