In early 2012 Legal Zoom, an online legal resource, reported that 75% of small business owners had no formal business succession plan.1 In addition, the Family Business Institute says that only 30% of family businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.2 The chief culprit, as you would imagine, is ineffective succession planning by the business owner. These numbers may come as a surprise to many but the simple fact is that most business owners are consumed by the responsibilities of running the day-to-day operations that they have little time to plan for succession. Nevertheless, business owners who ignore succession planning do so at significant risk to themselves, their employees, and their heirs.
Engaging in succession planning now, affords you more options, especially when it comes to mitigating tax liability.
Just as you would draft a will and other necessary documents to ensure suitable management of your personal estate, you need to create a succession plan to give your company the best chance for success after you exit. In fact, the absence of a proper plan may result in a decline in the value of the business in the event of the owner’s death or unexpected disability. Failure to plan can also lead to a loss of control over the final disposition of the company. Having a plan not only provides the ability to maintain such control over your company’s destiny, but can also help to avoid family infighting, which goes a long way to ensuring a smooth transition.
Naturally, every succession plan is different, but here are a few basic things for any owner to consider when thinking about succession.
Begin the process early on
Planning now affords you more options, especially when it comes to mitigating tax liability. The earlier you start transferring ownership, the smaller the estate tax bill will be after you die. Early action also allows you time to correct your course. When you know your objectives it becomes easier to develop a plan to pursue them. Consider the following questions: Do you want future income from the business for you and your spouse? What level of future involvement do you want in the business? Do you want to create a legacy for your family or a charity? What are the values that you want to ensure, perhaps as they relate to your employees or community?
Determine what your business requires to survive and grow and be prepared to admit, if necessary, that key members of the team may not ultimately be up to the task. For family businesses, keep in mind that what is best for the family may not always be the best option or consideration for the future direction of the company.
At Sensenig Capital, we have found that working together with a CPA and attorney that have specific knowledge in this area is crucial to the longer-term success of the plan.
Enlist the help of qualified experts
Business succession is a complicated exercise that involves a multifaceted set of tax rules and regulations, as well as estate planning concerns, and beyond. Before moving forward with a plan, consider working with legal and tax professionals who are familiar with the process and can guide you each step of the way.
At Sensenig Capital, we have found that working together with a CPA and attorney that have specific knowledge in this area is crucial to the longer-term success of the plan. These professionals often have advanced knowledge of tools such as buy/sell agreements, the proper way to gift shares, how to establish a variety of trusts, or even creating an employee stock ownership plan.
Consider loyal employees
Your plan should also address the vested interests of company officers and loyal employees; overlooking their contributions and value to the business could turn into a problem in the long-term. Don’t risk the possibility that they could leave and take your best customers with them.
Communicate, communicate, communicate
Discussing a succession plan clearly and honestly will help to effectively convert your ideas into action. Once implemented, you should revisit the plan regularly to make sure it remains relevant in the face of changing circumstances. Actively involving the key stakeholders (whether they are younger family members or key employees) will allow everyone to remain abreast of the original thoughts and reasoning of the succession plan.
1. Entrepreneur, February 15, 2012
2. Family Business Institute. Succession Planning. http://www.familybusinessinstitute.com/index.php/Succession-Planning/