Succession Planning for Business Owners
“How can I arrange for the transfer of my business when I retire and yet be able
to keep peace in the family?”
That’s a common question asked by owners of successful businesses when the time
comes to turn over the reins to the next generation. And, although there are no
simple solutions, formulating a succession plan prior to your exit may help you
leap some hurdles.
Goals of a succession plan
Briefly stated, a succession plan is an outline of the way that you expect your
business to continue when you are no longer at the helm. It serves as guidance to
your successors in a way that you believe will result in effective management of
your company with the least possible conflict. The plan may serve other purposes
as well, for example—help secure family financial interests in the business and
delineate strategies that will reduce significantly the impact of estate tax at
Ultimately, a carefully designed succession plan will increase the value of your
business while protecting your financial security in retirement. It will allow you
to exit gracefully from the business, having communicated accurately to your successors
(and nonsuccessors) what you have done and why you have done it.
The tension of “who?”
Naming the successor(s) to your business may be fraught with emotional conflict.
Sometimes the decision as to who will carry on for you is obvious—the choice of
a spouse or trusted employee may be logical and agreeable to all. If there’s only
one child in the family, and the child has been involved actively in the day-to-day
operation of the business, your exit should be relatively stress free.
On the other hand, you may have several children, some of whom work with you and
some of whom do not. The tension that could arise may come from their conflicting
expectations. Children who have been integral to the company’s success may feel
that they deserve more than their nonworking siblings. The nonworking siblings may
believe that the business is part of an overall family inheritance in which everyone
should share equally.
In Conflict and Communication in the Family Business, coauthors Joe Astrachan
and Christi McMillan, state it rather bluntly: A family that’s unable or unwilling
to talk openly, honestly, constructively and without fear of repercussions is much
more likely to kill its business than to strengthen it. And, although conflict can
be a positive catalyst among family members, it also may tear them apart.
Astrachan reports a classic example: “Few people realize inventor Thomas Edison
gave his son Tom $50 a week to STOP using his family name. Edison’s company, General
Electric became one of the most successful businesses in the world, yet Tom Jr.
died in obscurity under an assumed name.”
An open discussion, perhaps through a family meeting, or series of meetings, should
help to identify family member expectations and bring out into the open tensions
that, heretofore, may have lain hidden. Addressing these expectations and tensions
before the business is put into transition may avoid much unpleasantness.
Key elements of a plan
Every succession plan should be formulated according to the unique circumstances
of the business and the business owner. Still, there are several issues that will
need to be addressed in all cases. Recently, Grant Thornton, the accounting, tax
and business advisory organization, outlined some of the major factors that a business
will want to address as part of an exit strategy, including:
• the structuring of the proposed succession, including its tax consequences;
• contingency planning for unforeseen events and the drafting of the necessary documents
to ensure that the business will continue uninterrupted. For instance, there should
be a plan in case of the incapacity or premature death of a successor that might
include the drafting of a durable power of attorney and health care proxies;
• establishing a formal time for transfer of ownership and the delineation of transitional
roles in the business for family members and key employees;
• communicating the necessary aspects of the plan to family members, third parties
• drafting or revision of key documents, including shareholder agreements, corporate
restructuring plans, share transfers, insurance contracts, etc.
Development of an effective succession plan involves addressing three areas: management
of the business, ownership of the business and the potential tax consequences upon
passage of ownership. The first two items aren’t the same. You may want to transfer
management of the business to one child, but wish all to inherit equally, whether
they are involved actively in the business or not.
A succession plan demands expertise in several professional disciplines. As a result,
you may want to put together a team of advisors: lawyers, accountants, insurance
specialists and trust officers—people who can provide useful planning insights.
Timing is an important issue as well. Many professionals suggest putting a plan
in place at least five years ahead of the time of transition. Ten years may even
be better. In fact, some business advisors are recommending that an exit strategy
be built right into an initial business plan.
A final thought
Although a succession strategy may consist of several legal documents, your overall
perspective should be one of planning, not legalities. The purpose of a succession
plan, after all, is to keep peace and harmony in the family, not simply to serve
as an instrument to be produced during a heated court dispute.