Sep 05, 2019
Business succession planning: it is never too early
Why should a business owner take the time and spend the money to create a business succession plan?
Too often, owners of closely held businesses are so preoccupied with daily demands and challenges that they postpone the development of a business succession plan. By failing to provide for an orderly transition of ownership or management, business owners put themselves at risk of losing all or a substantial portion of the value of the company that they have dedicated their career and lifetime creating.
What is the solution?
First, it is imperative for owners to determine how they will sell or transfer their business to their successors and who those successors will be. They may be family members, key employees, a combination of the two or an outside company, which tends to be a competing firm in the same industry. Understandably, an owner’s choice of successors may change over time; therefore, owners should periodically analyze their transfer options and implement any needed changes to ensure the best future for their business. This is a process.
Involving family members
Owners need to develop a strategic plan that allows family members who will enter the business to be successful, while at the same time creating some type of equalization for those family members who opt out of or are excluded from participating in the company’s ownership and affairs. For instance, owners may gift a portion of the value of the business to family members who will enter the business but may also provide a life insurance policy payable to the family members who will not be part of the business. The family members who receive the proceeds of an insurance policy will be guaranteed a specific amount of funds while the other family members will either be successful or fail with the business.
It is essential to communicate the substance of the plan to family members and explain how each member of the family will be impacted. The current owners, who are usually the parents, need to openly share their family business vision. Keep in mind that if a business succession plan is not in place and the current owner passes away, the dissension and animosity that may occur at this juncture could be disastrous for all the parties’ relationships as well as for the business.
If an owner wants to sell all or a portion of the business to its employees, it is critical that they identify the employees who are capable of actually running the business. It is not unusual for closely held businesses to transfer ownership interest to some key employees while leaving control of the business in the hands of the younger generation. In these situations, the plan should establish a program which allows all parties in the succession plan to work together, understand their duties and receive the experience and training necessary to be efficient and successful.
Key components in a business succession plan
An overall succession plan should include a mission statement and involve estate planning, retirement and tax planning strategies designed to minimize taxes for the current owner and family members and maximize the transfer of wealth.
In the end, the success or failure of a succession plan is in the hands of the current owners. Owners can either take the time to develop a plan that will provide the greatest opportunity for their business to succeed or be sold at the highest price, or they run the risk of losing the business or having it sold at a significant discount.
Contact one of Chuhak & Tecson’s Corporate Transactions & Business Law attorneys to assist with the development of your business succession plan.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
Client alert authored by: Terrell J. Isselhard, Principal