While developing a business succession plan is essential for every business, it is often lost in the day to day focus of business operations. It is vital for family owned or closely held businesses to have a clear, concise and documented succession plan. Family owned businesses may provide unique challenges. Typically, the founders would like to pass the business to their children, regardless of their skills or interest in owning the business and at the same time the founders are looking to protect the value that they have built with the company.
Why You Need a Succession Plan
Not having a business succession plan for a family business is similar to not having a will and assuming that heirs will be able to treat each other fairly and equitable. However, in the business context, the results can be devastating. Not having one for a non-family owned business may severally hamper if not, derail, the ability of a business to remain viable.
Succession planning includes asking difficult questions. Who will manage the business – one of my children, a team of my relatives or a non-family member manager? Do your family members have the skill, temperament, interest and financial wherewithal to manage the business? Do you want to select a date and retire from the business or do you want to keep your hand in the daily operations of the business while you “test” the ability of the successor team? Should you sell the business to an unrelated third party? What if a health issue causes a disability and you are unexpectedly unable to assist in the business operations?
Succession Strategies
Each business is situation is different, so there is no “one size fits all” plan. If you are considering transitioning your business slowly you may consider selling a part of your ownership interest to a key employee or family member(s). Another option is structured buy out known as a buy-sell agreement. This can be with a family member or an unrelated company. One of your goals may be to structure the buy-out so that your retirement will be funded by payments staged over several years or a deferred compensation plan. How the transition of your company is structured can have significant tax ramifications. Depending upon the deal structure of your sale, the Internal Revenue Code will determine whether the sale will qualify for capital gain treatment or will be treated as ordinary income.
While no one wants to consider that they may become incapacitated and unable to work, disability and an untimely death are possibilities that each business owner must face Although some of the issues are the same whether you are retiring or unexpectedly unable to work, if you do not have a succession plan in place it can cause a significant financial impact upon your family. An unexpected loss of income, no experienced manager to run the business, a possibility of key employees leaving the business and potentially taking your customers with them and lack of cash to pay estate expenses, such as estate taxes are all real possibilities. It is important to dovetail a succession plan with your estate plan. If there is no close family member or key employee who would be able to take over and manage the business, it may be best to have a broker or trusted advisor locate a buyer, negotiate the purchase price and terms of sale and oversee the business operations until the sale can be completed.
Your advisors, including your accountant and attorney, can assist you with making decisions now that may have significant financial impact not only on you and your family but also on your business. A business succession plan should look to seamlessly transition to the new management or ownership structure, look to minimize the impact of taxes, protect the business that you have built, provide for you in your retirement and provide for your family in the future.
