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Succession planning vital to companies' survival

Posted online

by John Qua

for the Business Journal

Planning for business succession is an important way to protect the value of your investment in your business, but business owners often fail to plan for the future. This unfortunate fact was confirmed by planning professionals surveyed recently by Merrill Lynch.

Planning gives you the assurance that the company you have worked so hard to build will provide a return that reflects your years of effort. It can help you plan for every eventuality, whether you want to groom a family member for ownership, obtain an infusion of capital to grow your business now or create liquidity from your business, either now or when you're ready to retire. In the case of estate planning, it can prevent the possibility that your business might have to be sold to settle estate-tax liabilities.

Disturbing differences of opinion.

Every other year, Merrill Lynch conducts a study examining individuals' attitudes, awareness and behavior regarding estate planning. In 1997, for the first time, we also included the opinions of about 150 attorneys and accountants whose practices include estate planning.

The study indicates that, in general, individuals are more comfortable with their estate-planning preparations than professionals think they should be. While nearly eight out of 10 individuals consider themselves well- to very well-prepared to smoothly transfer their estates, only three out of 10 professionals believe the general public is this well-prepared.

In the professionals' view, business owners are no better prepared to meet financial and estate-planning goals than the general public. Professionals who have business estate-planning clients say that less than 5 percent of business owners are well-prepared to pass on their business interests. Three in 10 consider their business-owning clients as poorly or not at all prepared.

The steps not taken.

When our survey examined the steps business owners believe they should take to prepare for the future and the steps they have actually taken, it seems the professionals' pessimism is justified. Few business owners are taking action on the issues they themselves rate as most important in estate planning.

While business owners identified the following six actions as vital to estate planning:

?Fewer than four in 10 (39 percent) have taken the preparatory step of establishing or updating business valuation.

?A transfer of ownership has been arranged by just 37 percent of owners.

?Only one-third of business owners have made funds available to continue the business.

?Just two out of 10 have prepared a buy-sell agreement.

?Only 14 percent have set up a family limited partnership.

?Only 11 percent have arranged for the sale of the business.

Common planning mistakes lead to lack of action.

Business owners may not be performing these crucial steps for estate protection because they aren't engaged in the focused planning that is necessary to plot an appropriate course of action. Professionals say the most common estate-planning mistakes made by their business clients are the failure to plan (24 percent) and the lack of a succession or transition plan (38 percent).

Most business owners seem aware of the need for succession and estate planning, yet they aren't doing it. Why not? Year after year, our surveys have found that the fact that people consider estate-planning issues to be important doesn't mean they are taking steps to address them. People give many excuses for not planning, including: "I don't need estate planning, because I'm in good health." "I'll think about estate planning when I'm older." "I just haven't gotten around to doing any estate planning."

When professionals are asked about the greatest barrier keeping business owners and other clients from developing estate plans, about a third cite procrastination, while another third believe the greatest barrier is a reluctance to face one's own mortality. These are not good reasons for failing to protect your business or provide for your family.

Talk with a professional.

Business owners, perhaps even more than other individuals, need a well-developed, written estate plan. Yet, despite their potentially more complicated estates, business owners in our survey were less likely than the general public to have consulted professional advisers. Estate planning is not a do-it-yourself project. Talking with a professional can help you see the overall picture and give you access to valuable expertise and experience.

A professional adviser can help you set appropriate goals and show you how various estate-planning and succession strategies may benefit you, your family and your business. Even if you already have a succession and estate plan in place, in light of recent tax law changes, now is a good time to talk with your adviser about whether your plan should be revised.

(John Qua is senior vice president and director of business financial services for Merrill Lynch.)

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