Krispy Kreme and Wal-Mart have a lot in common. Die-hard fans line up in front of their locked doors the night before grand openings, licking their lips for a puffed up glazed doughnut or a bargain that can set the neighbors talking over the fences. But what do these two incredibly successful businesses and the families that started them have that sets them apart?
Sam Walton, founder of Wal-Mart, is an excellent example of a man who planned not only for the future of his business, but also for the future of his family. Effective estate planning allowed Sam Walton to protect his wealth and pass it on to his heirs when he died.
But not all entrepreneurs take an active interest in planning for the future of their business, as well as for their family. Vernon Rudolph, founder of Krispy Kreme, is a case in point. While he was a successful doughnut maker and entrepreneur, his failure to create a succession plan for his family business left his family without a business. Upon his death in 1973, Krispy Kreme had to be sold because Rudolph had no business succession plan.
The failure to plan is central to the downfall of many family businesses. Only 30% are successfully passed to the next generation, 12% to the second generation, and 3% to the third generation. Sam Walton’s sound succession planning benefited his family and allowed them to maintain an active role in Wal-Mart. Vernon Rudolph’s tale exemplifies the risk in failing to plan.
Business succession planning provides business stability, tax savings, and most importantly peace of mind. The central questions are who should take over the business when you phase out your involvement and how will that transition be funded. Choosing a successor is not an easy task. But, if you plan ahead, a successor can be groomed slowly and will be ready to step in should unforeseen circumstances arise. Once the identity of the successor is chosen, a strategy can be formulated to accomplish the goal. The strategy can allow you to retain control for as long as you want while putting a mechanism in place that will allow you to have an exit strategy. The strategy may include a buy-sell agreement. Such an agreement allows your successor to purchase shares of stock from you at a time chosen by you, such as your death or disability. Life insurance or other funding mechanisms can be put in place to make sure your successor has the capital necessary to buy out your interests without crippling the business with debt.
These strategies can include income and estate tax savings in addition to providing you peace of mind and business stability.
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