A high school football coach knows that some of the team’s most talented and experienced players will graduate each year, taking their skills and experience with them. A good coach does everything possible to make sure there are talented new players ready to move up.
Family business owners need to look to the future in much the same way through the process of succession planning. Some say it’s one of the most critical challenges that a family business owner faces. Unfortunately, it is also one of the most often ignored, misunderstood, mishandled and otherwise neglected duties.
Why succession planning is important
At some point in the life of a closely-held business, the owner or owners should ask, “What happens to this company when I’m gone?” It doesn’t matter if the owner’s absence is due to retirement, death, disability or some other reason; if there is no concrete answer to the question, it is time to start planning.
By eliminating variables and ironing out details ahead of time, business owners and family members can generally realize a more favorable sale price, reduce tax liabilities and improve the company’s chances of survival past the transition.
Why is succession planning so important to long-term success?
- Tax Considerations. Whether there is a sale of assets or a transfer of ownership over time, there will likely be income and/or estate taxes due. How much depends on how the transaction is structured, whether it took place before or after death, and other variables. Financial and legal professionals can provide strategies to minimize tax liabilities on the buyer and the seller.
- The Retirement Boom. Millions of Baby Boomers are business owners on the brink of retirement. As they leave the workforce, a generation of experience, leadership and entrepreneurial passion goes with them. If the upcoming talent pool is not ready to replace these leaders, hundreds of companies could lose their competitive edge.
- The Relentless March of Time. An ownership transition plan can take as long as 10 years to execute. Orderly management succession without an ownership change can take as long as five years. Procrastination leads to rushed decisions that may not be in the best interests of the individuals or the business.
- Continuity. If a business owner’s goals, vision and strategies retire or die with them, adapting to new ownership will be that much more difficult. It is more effective to anticipate and address change with a solid plan.
A Plan of Action
START EARLY. At least 10 years in advance is recommended. Generally, the more time spent on planning, the fewer problems.
INVOLVE EVERYONE. Consider all of the people who will be affected by the plan-children, grandchildren, siblings, spouse. Open a dialogue early to determine their expectations.
BE REALISTIC. The owner may have always dreamed of his/her oldest child running the business, but that child hasn’t shown the slightest interest. Maybe there is another family member or key employee who would do a better job. Be objective-think of what’s best for the business.
CHOSE FAIR OVER EQUAL. Equal may seem fair, but is it in the best interests of the business? If a child’s only interest is financial, and not in the running of the business, make arrangements for that child to receive assets other than business assets.
TRAIN A SUCCESSOR. Whether the successor is a family member or someone else, work directly with that person, share decision-making and impart as much knowledge and experience as possible.
GET OUTSIDE HELP. This is too important to attempt alone. Lawyers, accountants, financial advisors and maybe even family counselors will be needed to facilitate discussions and iron out details. Investing the time and money for professional advice now will pay big dividends later.
WALK AWAY. After the transition is complete, go fishing. Stay out of the new owner’s way and let them make the decisions.
Dealing with family issues
In many family businesses, there are family members who expect to gain control of the business someday, and those who want nothing to do with it. But that’s just the beginning of the potential conflict. Given sufficient time, family issues can be resolved. Left unaddressed, they are likely to hold the company back from its full potential.
There are many strategies for transferring assets to a new owner or group of owners. Transferring control is even more complex and challenging when family dynamics and relationships enter the picture. Emotions can overpower logic and reason. Planning and negotiations may eventually break down due to a lack of communication or an unwillingness to compromise.
Equal versus fair
As an example, consider the husband-and-wife owners of a manufacturing operation. They have three children, but only the middle child has shown any interest in the business. Even though they are not actively involved, the other two siblings are fully aware of the potential value of the company and expect that a part of it will one day be theirs.
The dilemma facing the parents is whether to transfer ownership equally among the siblings, or give controlling interest to the one who is involved in the company. As parents, they want to treat everyone equally. As business owners, they know that they need to do what is right for the future of the company. Giving equal interest to the two absent children may do nothing to advance the company toward its goals. In fact, it may do more harm than good.
Unfortunately, many owners simply decide not to decide. They may claim to be too busy, but in reality, they do not want to face the difficult choices. As a consequence, no plan is ever made.
Granted, these aren’t easy choices. But conflict among family members can often be averted if issues are recognized and addressed early.
Ultimately, the goal of a family business succession plan is to minimize the inevitable disruption caused by ownership and leadership changes. That can only happen when the sketchy ideas in one person’s head are formalized, discussed and refined into a well-defined plan. The best time to jumpstart the process is today. iBi
Mark M. Dalbey, CPA, is a partner in Clifton Gunderson’s Peoria office. He has more than 12 years of experience and specializes in taxation.