Part of planning for business “success,” is planning “succession.” This means plans to transfer ownership and management as you age, near retirement, take life easier or even die. Good succession planning allows a smooth transition to the next generation of owners and management.
Succession planning differs depending on dynamics of the business: whether the owners are family, multiple families, unrelated business partners, or a combination of these; how well the owners and families get along; whether all or only some of them want to be in the business; and questions about who is best to manage the business. Succession planning also depends on the personal desires of the different parties involved, the size and complexity of the business and a range of other factors. This is why no two succession plans are the same.
A typical succession plan involves some form of gradual buy-ins to the business by a new generation of dedicated personnel, often combined with step-by step retirements by senior owners and managers. Another common plan is a significant buyout event, with current owners selling all or major portions of their interest to a management team. A third approach uses life insurance, purchased by the company, to fund buyouts of owners who die.
In family-owned businesses, aging family often want to increase the next generation’s responsibility at a pace they can handle. This eases younger family into running and eventually owning the company, provides time to work together, and tests the younger generation’s ability in a setting that lets current owners work with them and judge their performance.
Usually, not all family members want to own or run the business. Sometimes, help is still needed from children and siblings who moved away to pursue other dreams, and they are asked to return to the business. Sometimes, it is apparent that some of those who want to run the business don't have the necessary skills. Planning a succession also means solving tensions that arise as some are asked to stay or return, and some are chosen over others.
Taxes are another important issue in succession planning. Owners often sell their interest in a company for more than they invested to acquire that share. The difference between today’s sale price, and the amount invested in the past, is viewed by the government as taxable income. The taxes can be large, so many succession plans include steps to reduce taxes.
The best succession plans result in smooth transitions of ownership and management so the business can endure and grow beyond any particular ownership or management team. The best plans seek to satisfy everyone financially, allow everyone to perform a role they are suited for and comfortable with, and avoid unnecessary taxes.
The best time to develop a succession plan is usually “now.” Early planning gives you more time to form the plan in a comfortable time frame, get input from those who are affected, and adjust the plan to accommodate changes in the company, people’s needs and their life situations.
Some common principles are well known for developing succession plans. It is a good idea to allow some participation from each person who has an interest in the plan. At a minimum their ideas should be considered, and they may all be given the chance to provide input as a plan is developed. A possible goal is to achieve a plan that is the collective work of everyone who is impacted, not a plan developed and imposed by a select few.
Key Factors To Consider
Here are some of the main factors to consider when developing a succession plan:
• If you are the owner of the business, when do you want to relinquish control of the business?
• Who will be the next generation of owners and managers?
• Will all candidates receive equal ownership, or should ownership be based on talent, size of investment, or other formula? In the case of a family-owned business, are other measures needed to equalize transfers of value among those who participate in the business, compared with family members who are not actively involved?
• What business structure or entity should be used for the business -- corporation, limited liability company, general or limited partnership?
• Steps to let current owners and managers keep control for the right length of time and to transfer when they and the next generation are ready.
• Steps to reduce and resolve disputes and minimize risks of decision-making deadlock that can freeze progress.
• Ways for the new owners of the business to fund their purchases of ownership.
When deciding on a succession plan, it is important to work with professional advisors, like company lawyers, accountants, bankers and insurance representatives. They provide objectivity and guidance based on training, professional knowledge and experience in legal, accounting, banking and insurance aspects of the plan.
By planning businesses succession, owners are more likely to ensure a business’s long term success. It is never too soon to consider these issues.
Contact an attorney at Triscaro & Associates today. Please call us for all your legal needs. We offer a full range of legal services to individuals, families and businesses, including personal injury, estate planning, real estate, family law and business matters. We are dedicated to providing the highest quality legal services at a reasonable cost.