SUCCESSION PLANNING: DEVELOPING A PLAN FOR
by Louis P. Stanasolovich, CFP®, President,
Legend Financial Advisors
A business succession plan is a detailed analysis of the
business’ assets, liabilities, equipment, personnel,
operations and earnings potential. A succession plan also
provides management or the new owners of the business (usually
family members) with an outline to follow if there is an
emergency. The plan also would provide a formula for passing the
business on eventually when the business owner retires or upon
Many experts agree that business owners should start planning
for the sale of their business the day they start their
business. Yet, only approximately thirty percent (30 %) have a
written business succession plan.
Before starting a succession plan, owners should keep in mind
the following advice:
- Set realistic succession goals.
- Think of the plan as a living document. Revisit it once
per year and more frequently as retirement draws nearer or
in the event of failing health.
- Decide what qualities the ideal successor should
possess. Will the successor be an employee or a family
member or will it be an outsider if the company is to
The first step in formal succession planning is to form a
team of advisors to plan for the succession. The team is usually
composed of the business owner’s attorney, accountant, banker
(if financing is involved), business appraiser, financial
planner, and life insurance agent. Before any meetings with the
planning team, owners should be prepared to answer the following
- What should the plan accomplish?
- What is an acceptable value for the business?
- When and how will the business be transferred?
- Who are possible successors?
Owners should also know what role, if any, that they want to
play in the business after the sale.
Next, the business’ value must be determined. This is best
accomplished using the services of a valuation expert such as a
business appraiser or CPA who spends the majority of his or her
time doing business appraisals. This expert should be able to
help market the business to potential buyers as well as track
sales of comparable businesses.
Some common mistakes business owners make at this point are:
- Talking too much. The competition (they might want to
steal the customers) and employees (a mass exodus) do not
need to know immediately that a sale may take place in the
- Underestimating the value of the business. This is why
valuation experts should be consulted.
Next, owners should research the market that would buy the
business. The business should then be evaluated as an investment
from a buyer’s perspective. Third, owners should know ahead of
time how much money a successor must have to buy and sustain the
business. The reason for this is that business owners frequently
hold a note receivable for a portion of the proceeds of the sale
price or the amount of money paid out may be contingent upon
future revenue and/or profits.
When owners are at the point where they are talking to
buyers, many make common mistakes such as:
- Thinking a buyer is qualified when he/she is not.
- Talking with only one buyer.
- Disclosing too much information too early in the
The last step in succession planning is dealing with the
post-sale issues. Former business owners, should have an
investment plan ready for the sale proceeds. They should also
have new personal plans and goals. They should also remember
that the old write-offs, health and disability insurance, club
memberships, mileage, etc. no longer apply to them and they must
adjust their financial plan accordingly.
A succession plan is just as important as a business plan.
The longer planning is put off, the greater the chance that the
business owner and his or her family could get hurt.
Louis P. Stanasolovich, CFP, has been named as one of the
best financial advisors in America six times by Worth magazine
and has been honored by Medical Economics as one of the best
financial advisors in America for doctors four times, and by
Mutual Funds magazine two consecutive years. He is CEO,
President and founder of Legend Financial Advisors, Inc.®, a
fee-only financial advisory firm with headquarters located in
Pittsburgh. Legend provides Wealth Advisory Services including
Comprehensive Financial Planning and Investment Management to
individuals and businesses.
Legend Financial Advisors, Inc.®
5700 Corporate Drive, Suite 350
Pittsburgh, PA 15237-5829
Phone: (412) 635-9210
Fax: (412) 635-9213
Toll Free: (888) 236-5960
Web Site: www.legend-financial.com