The operational demands of running a family business or other closely held enterprise can be all-consuming, but it’s vital that business leaders take the time needed to assess their organisation’s business succession planning. The penalty for failing to get ahead of leadership or ownership changes can be significant, as the coming years may bring substantial transfers of wealth as businesses change hands and adopt new ownership structures. The long-term survival of a business, and the preservation of the wealth that has been built, will likely depend on getting ahead of those changes through strategic succession planning.
For private, owner-managed, or family-owned businesses, a solid succession plan can drive the growth of the business, reduce taxes, and set the stage for retirement. Family-run businesses may benefit further by focusing on preserving harmony within the family.
This is not a subject to be put off until later; to be done successfully, it needs to be an integral part of a company’s business strategy and operations.
No one goes through the work, risk, and sacrifice
of starting a business without hoping it will last.
Building value that endures is the dream that motivates entrepreneurs. Yet in many businesses, too little of that work goes into determining who will take over when the founders leave the stage.
For a business, working without a succession plan can invite disruption, uncertainty, and conflict, and endangers future competitiveness. For companies that are family- owned or controlled, the issue of succession also introduces deeply emotional personal issues and may widen the circle of stakeholders to include non-employee family members.
The next 10 to 15 years may bring substantial transfers
of wealth through business ownership handoffs across generations and other new ownership structures. The long- term survival of those businesses, and the preservation of the wealth they have built, will depend upon a clear and early focus on strategic succession planning.
The need for planning
Succession planning is a multidisciplinary process. When you engage in succession planning, you’re not just focusing on the future, because it’s impossible to plan for the future without a deep understanding of the present. Leaders have to know the current reality of their businesses — how they operate, where the value lies, what their needs are, who their most vital customers are and why — in order to prepare for new leadership and new structures that can provide continuity in the ways that matter.
There are many benefits for companies and owners who plan properly and strategically for an orderly transition of management and ownership:
Succession planning — a starting point
Compare your status quo to the questions below. If one or more “no” answers reveal deficiencies in your approach, know that you aren’t alone — and that it’s not too late.
- Have you defined your personal goals and a vision for the transfer of ownership and management of the company?
- Do you have an identified successor in place?
- If applicable, have you resolved the family issues that often accompany leadership and ownership decisions?
- Does your plan include a strategy to reduce estate taxes?
- Will there be sufficient liquidity to avoid the forced sale of the business?
- If succession will one day require the transfer of assets, have you executed a “buy-sell” agreement that details the process ahead of time?
- Is there a detailed contingency plan in case the business owner dies or becomes unable to continue working sooner than anticipated?
- Have you identified and considered alternative corporate structures or stock-transfer techniques that might help the company achieve its succession goals?
- Have you determined whether you or anyone else will depend upon the business to meet retirement cash flow needs?
- Have you recently had the business valued and analyzed in the same way potential buyers and competitors would?
A good plan takes time to develop and implement.
George is a closely held business owner in his early 60s. Two of his children, Mark and Elle, are relatively inexperienced at working in the business, and a third child, Geoff, does not work in the business at all. George wants to scale back involvement in the business so he and his wife can move away and enjoy their retirement years together. With outside help, George builds an estate plan that includes family partnerships and trusts that hold insurance and company stock. The family’s perception is that the business succession plan is “complete.”
A year later, George is ready to retire, but cannot because the siblings are floundering in their executive development. George relies more on non-family employees, who are not in line for ownership, to get things done. Mark and Elle resent this. Meanwhile, Geoff feels the salaries, company cars, and other benefits Mark and Elle draw from the company are coming at the expense of his inheritance. When George finally does pull away, Mark and Elle assert their leadership in the resulting vacuum despite their lack of preparedness. Several important executives and customers leave, sales fall off, and the top salespeople go to the competition. Geoff wants Mark and Elle demoted or fired to protect the value of the inheritance. George worries about the value of his stake as a source of retirement funding.
Months later, company operations continue to suffer. The children are no longer speaking with each other and holiday get-togethers are cancelled. Geoff forces a sale of the business for cash, but the family receives only a fraction of the amount that financial advisors and attorneys projected years earlier in the estate plan. Taxes eat half of even that disappointing sum.
Mark and Elle are not equipped to find similar high- level jobs elsewhere, and they struggle professionally. Geoff blames Mark and Elle for gutting his inheritance. George must revisit his post-retirement dreams. In the aftermath of the sale of the business, all the estate tax planning accomplished years before has been unraveled.
George relied on specialists for sophisticated estate planning. Why did everything go wrong? In reality, estate planning is only one facet of succession planning. George made a plan for transferring enterprise value, but not one for continuing to generate or maintain that value. His approach to succession planning should have incorporated management talent assessment, compensation planning, stock transfer strategies, formal directorship roles for both family and non-family officers, corporate structuring, communication plans, and estate planning.
Building an estate plan entails more than setting up wills, trusts, and Power of Attorneys. The first step is to determine the extent of estate tax exposure in order to prepare the way for further succession planning.
To determine the value of your current estate and for assistance in projecting its future value, it’s a good idea to talk to a professional financial advisor. Reviewing the situations and strategies that follow is a valuable way to prepare for that conversation.
When developing an effective estate and gift tax plan, you should also consider other elements of succession planning, such as developing and motivating management talent, transferring ownership, retaining key employees, dealing fairly with family members who may or may not be actively employed in the business, disability planning, retirement planning, and investment portfolio strategies. Other volumes in this series treat many of these issues in detail.