A Publication of WTVP

Many business owners harbor a dream that the company they built and nurtured from the ground up will succeed beyond their own lifetimes. In passing on their legacy, they hope their own children will reap some of the financial and emotional rewards they enjoyed as their businesses grew. In reality, according to an article in a 2004 issue of The Economist, just one third of America’s family enterprises are likely to succeed to the next generation.

It is common for family and business issues to collide head-on when planning for the next generation of a family-owned business. Many owners, for example, in an attempt to be fair, may desire to give each of their children an equal portion of the business. But fairness does not always mean equality, and while one child may have a high level of interest in the family business, another may have none. For parents who have spent a lifetime convincing their children that they love all of them equally, this hurdle can be a tough one to overcome.

In successful succession planning, the challenge for the business owner is to separate family and business issues and focus on the main objective of preserving the business. The succession process begins by answering three very important questions:

  1. Who? Consider who might be best-suited for the job before factoring in any emotional issues. A fundamental question facing a business owner is whether the business can survive a transition to family members. If only family members are considered, who has the most aptitude and interest? If a surviving spouse would be considered, how active has he or she been in the business? Are there key employees—non-family members—to consider?
  2. When? Does the owner plan to retire, or does he or she simply want to be prepared in the event disability or death forces the issue? Does the owner want to gradually cut back on any or all aspects of the business?
  3. How? Will ownership in the business be transferred through a gift or a sale in accordance with a business purchase agreement? How will it be funded and where will the money come from? Can the new owner or owners finance the transfer without negatively impacting the business? Is a steady stream of income needed to fund the owner’s retirement?

The earlier the process starts, the more time and thought the owner can put into answering these questions and testing some options. It requires thoughtful preparation and some time to get a chosen successor up to speed. Giving one employee additional responsibilities, for example, might help in gauging his or her readiness for a top slot.

Once the business succession strategy is defined, it should be written down and discussed with everyone involved, especially if they have not been a part of its preparation. While frank discussions about succeeding control and eventual mortality can be difficult, family members are generally reassured when they understand the reasons behind those decisions.

The issue of financial fairness for all family members can also be addressed after the framework for a succession plan has been laid. Preferred stock plans, life insurance and the sale, gift or bequest of other assets are just some of the tools that can be used to balance the amount left to each surviving heir.

Financial professionals can be invaluable in sorting through the possibilities. Oftentimes insurance, tax and/or legal professionals familiar with the business but not immersed in the day-to-day operations can provide good, unbiased opinions. They can also help the owner overcome some of the obstacles the plan might create, such as finding ways to minimize the tax liability. Additionally, once objectives and motives are fully understood, financial professionals can usually find ways to develop a plan that all family members will find to be fair.

Whether you plan to retire early or work until the day you die, pass your business on to family members or sell it outright, succession planning is an important and ongoing process that should be started early. If you want to help ensure your business and your family will be taken care of in a way you have always dreamed of, you owe it to yourself and to them to make adequate plans. iBi