Nearly 75 percent of small businesses don’t have a succession plan, according to a recent survey.1 To put that into perspective, it’s as though three-quarters of the commercial jets in the air right now don’t have a co-pilot. That may sound dramatic but think about it. If the owner of a small business suddenly dies or becomes incapacitated, the company may stay aloft for a time — but the odds of an optimal outcome rapidly diminish without a plan in place.
This daredevil bent is not surprising: Entrepreneurs tend to be calculated risk takers. In a recent study, entrepreneurs typically align with the financial profile of Ambitious Spenders who put an emphasis on saving to start or expand a business.
But protecting a business is as important as growing it. Research also shows that Ambitious Spenders prioritize creating wealth and building a legacy. With the right succession planning, small business owners can help to ensure both the long-term success of their business — and greater financial confidence for themselves and their family for years to come.
Here are three steps to help get your succession planning off the ground:
ASK TOUGH QUESTIONS
Succession planning is a blueprint for continuing or liquidating a business when the owner is no longer involved. If continuance is the goal, who will take control? Many business owners assume their children will want to be involved, but that may not be the case. Some issues to explore:
- Are my family members interested in running the business?
- Do they have the skills and aptitude?
- How will those family members who are uninterested in the business share in the legacy?
- Would it be preferable for an outsider to assume ownership?
- How will that transition be managed to protect my heirs?
INSURE AGAINST THE UNKNOWN
Insurance is a key element in a business succession plan.
- Whole life insurance: In the event of an owner’s untimely death, the benefits from a whole life insurance policy may be used to pay creditors and provide survivors with financial resources to either maintain the business or liquidate it. If the owner decides to retire, a whole life policy may be used to fund supplemental retirement income.2
- Disability insurance: Disability insurance can help replace a portion of income if an owner is unable to work due to illness or injury. The proceeds can help the business meet its day-to-day expenses, as well as business loans and other longer-term financial obligations — until the owner is back on his or her feet.
CONSULT WITH A FINANCIAL SPECIALIST
Developing a well-designed succession plan can be one of the most significant financial decisions you’ll make. Here’s a quick overview of just some of the complex issues involved—which is why you should consider consulting with a knowledgeable financial professional who takes the time to understand your business and provide unbiased advice. Owners of high-growth, small businesses are more likely to rely on advice from professionals than owners of companies with declining revenue.3 Knowing this positive correlation between planning and success, a solid business succession plan will help you feel even more confident in your financial future.
Finally, if you’re not yet an entrepreneur and thinking of starting a business, check out these tips on starting, growing, and protecting your small business dream.
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2 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Individual disability income products: An individual’s eligibility for benefits is determined on a case-by- case basis, taking into consideration the factual circumstances presented as well as the terms and conditions of his/her policy(ies). Individual disability income products underwritten and issued by Berkshire Life Insurance Company of America (BLICOA), Pittsfield, MA. BLICOA is a wholly owned stock subsidiary of and administrator for The Guardian Life Insurance Company of America (Guardian), New York, NY or provided by Guardian. Product provisions and availability may vary by state.