My family's brush with succession planning.

Although he grew up around the business started by his grandfather in 1908, my teenage father was forced to grow up in the business when his own father unexpectedly passed away. His entry into, and exit from, that business illustrate the importance of succession planning and the ability to adapt.

The topic of succession planning evokes dread and emotion for many business owners. Some simply ignore the subject, but those able to face reality take action to ensure they will control not just their destiny, but also their company's future. My father's early lesson served him well down the road.

Fast forward 30 years. The business had grown and prospered under my father's direction. I was coming up on my senior year in college and looking forward to graduation. Although my father and I never discussed life after college, both of us assumed I would come into the business. One day during the summer before my senior year, Dad called to tell me that someone had made an unsolicited offer for the business. We talked and he assured me that he would keep the business if I wanted it; otherwise, he would sell it.

My decision--probably one of the best ones in my life--was to sell, and I based it on three factors.

First, accepting the offer allowed Dad to play tennis in Florida every day for the next 20 years. Second, I had no real passion for the business, despite having worked in it. Third, and perhaps most important, I recognized the difficulty in working with my father.

A Time to Sell

Dad was fortunate. He was busy growing the business and did not expect a white knight to knock on the door. According to Jay Stevenson, an attorney and CPA specializing in estate planning, that is precisely the time to sell.

"The best time to sell a business is when it is a going concern, and the key business owner/manager is healthy and still actively involved in the day-to-day operations of the business," says Stevenson, who says that my family's experience was extremely unusual. "The sale or transfer of any family-run business requires advance preparation, sometimes several years before you are really ready to put the business on the market or actually start the process of transferring it to the next generation." He emphasizes that there are different tax consequences depending on how the sale is structured.

Alan Tolmas, CPA/ABV, CVA, a business appraiser and an expert in Employee Stock Ownership Plans (ESOPs) with Hill Schwartz Spilker Keller, LLC, in Dallas, Texas, agrees. He believes that a minimum of three years is needed to develop and implement a good succession plan, although most companies need between five and seven years.

Why so long? Numerous tasks need to be accomplished, including deciding to act and following through on it, identifying the professionals to help, valuing the business, identifying the succession strategy and players, and actually implementing the plan. Tolmas shares that many business owners, "who want to get out of business, don't want to get out completely. It is 'their baby' and they don't want to let it go. Many owners have a difficult time separating because their business has been such an integral part of their life."

Tolmas shares two interesting statistics. First, according to Joseph Astrachan, Ph.D., editor of Family Business Review, more than 30 percent of all family owned businesses survive into the second generation. Looking at that number differently indicates that a larger percentage don't survive into the second generation.

Second, according to Raymond Institute/MassMutual in the 2003 American Family Business Survey, 19 percent of family business participants have not completed any estate planning other than writing a will, and only 37 percent have written a strategic plan. Consequently, Tolmas suggests that an owner consider an ESOP as a way to cash out if their business has long time to go, they have qualified employees and the business won't pass to a next generation.

Business Value vs. Emotional Value

Now that you are thinking about succession, what is your first step? Rick Jenson of CBIZ Valuation group, LLC, advises to "get with your most trusted adviser, whether it is your banker, lawyer or accountant" to start the process. One of the first steps is to accurately value your business.

"Too many owners base their company's worth on 'sweat equity,' the years of hard work and high emotion they have invested in their business. It may have nothing to do with market value." Jenson suggests using a credentialed valuation expert to determine a company's market value.

Some of the more common designations used by business valuation professionals include the ABV (Accredited in Business Valuation) from the American Institute of CPAs and the ASA (Accredited Senior Appraiser) issued by the American Society of Appraisers. While these and other designations represent a professional competency, make sure you evaluate each person's experience and background, because there are multiple methods to value a business.

Many decisions in succession planning are personal. For example, are there sons, daughters, nieces and nephews involved in the business? Are any, all or just some of them competent to drive the business? Do they all want to be in the business? How will family relationships be affected by the transition?

I know of one family that sold a very large, successful business. Two brothers owned it and each had at least one child involved in the company. The sale provided liquidity to the owners and their children, and selling was their method for keeping peace in the family despite having at least one child capable of running the business.

If you decide to sell, to whom can you sell the business--employees, third parties, competitors, vendors, customers? How do you value the business? How do you successfully transition from boss to adviser or to retirement? These questions are difficult and should be addressed with the help of your trusted professional advisers.

It scares most people to look at their own mortality and make appropriate plans. Inaction as a business owner, however, is not a responsible plan, and it is not fair to your family, long-time employees and valued customers. Unless you make the decision to build and implement a succession plan, three things in life are certain: death, taxes and a guarantee that someone will make the decision for you--one that may not be to your liking.

Robert Yudkin, CMA, specializes in internal systems consulting. Contact him at ryudkin@swbell.net.