Health concerns, however, can compel succession earlier than expected. A business owner's incapacity, incompetency, or disability may render the owner incapable of transitioning a business to a successor. But, death is unquestionably the most severe of the reasons compelling succession of a business. Given the risk that a poorly planned succession might rob the business owner's heirs of a substantial inheritance, and risk otherwise guaranteed inheritance by burdening an estate and heirs with debts and obligations, one would assume that most business owners consider carefully succession of their business.
Many, however, aren't thinking about it at all.
In a recent Harris/Decima survey of 650 U.S. business owners, conducted for Harris Bank and its parent company, BMO Financial Group, 46% of business owners are thinking about a succession plan, and the vast majority (80%) has yet to identify a successor. The study also found that:
- Larger businesses are more likely to have a formal succession plan in place (45% larger vs. 14% smaller). Larger businesses are also more likely to say having a formal succession plan in place is important (78% vs. 42%).
- When it comes to succession planning, the vast majority of business owners (80%) have not yet identified a successor for their business for when they retire.
"Stability, wealth preservation, family harmony and peace of mind are four good reasons why it's never too early to begin a plan. While business owners should probably start planning at least 5-10 years before transitioning control, it's never too late to start," said Mike Stanton, Vice President and Wealth Advisor, Harris Private Bank. "The more time you have to plan, the more effective the plan can be. For example, over time, you can transfer ownership shares of a company without gift tax ramifications, and through that transfer, minimize future estate taxes."
Statistics show that seventy percent (70%) of entrepreneur-owned businesses do not survive the founder. It is devastating to consider that your life's work may be obliterated by circumstances that are foreseeable, and avoidable. Among the most likely challenges faced upon succession are taxes and family discord. Succession planning concerns primarily management, ownership, and taxes, but is broad planning designed specifically for each business owner. This may appear to be a daunting task to a business owner.
Fortunately, help is available. Most successful business owners already depend on a network of help to manage their financial, tax, and legal affairs; maybe even marketing, distribution and HR issues. Small business owners are often too emotionally involved to make good succession plans, so it makes sense for someone the business owner trusts to develop a plan. The first step, however, is the commitment of a business owner to sit down with professional and start planning.
The online survey referenced was conducted by Harris/Decima among 650 Canadian business owners (400 small, 250 larger) and 650 U.S. business owners (400 small, 250 larger). Data was collected between Sept. 22 and Oct. 10, 2010. Results were weighted using employee size within region. Small businesses were defined as having between 1-49 employees, and larger businesses were defined as having 50+ employees.
For more information regarding succession planning, visit the Online Estate Planning Center. Additional resources can be found at the Harris succession planning site.
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