Business Succession Planning
By: Beth
Cohn
While developing a business succession plan is essential for
every business, it is often lost in the day to day focus of
business operations. It is vital for family owned or closely
held businesses to have a clear, concise and documented succession
plan. Family owned businesses may provide unique
challenges. Typically, the founders would like to pass the
business to their children, regardless of their skills or interest
in owning the business and at the same time the founders are
looking to protect the value that they have built with the
company.
Not having a business succession plan for a family business is
similar to not having a will and assuming that heirs will be able
to treat each other fairly and equitable. However, in the
business context, the results can be devastating. Not
having one for a non-family owned business may severally hamper if
not, derail, the ability of a business to remain viable.
Succession planning includes asking difficult questions.
Who will manage the business - one of my children, a team of my
relatives or a non-family member manager? Do your family
members have the skill, temperament, interest and financial
wherewithal to manage the business? Do you want to select a
date and retire from the business or do you want to keep your hand
in the daily operations of the business while you "test" the
ability of the successor team? Should you sell the business
to an unrelated third party? What if a health issue causes a
disability and you are unexpectedly unable to assist in the
business operations?
Each business is situation is different, so there is no "one
size fits all" plan. If you are considering transitioning
your business slowly you may consider selling a part of your
ownership interest to a key employee or family member(s).
Another option is structured buy out known as a buy-sell
agreement. This can be with a family member or an unrelated
company. One of your goals may be to structure the buy-out so
that your retirement will be funded by payments staged over several
years or a deferred compensation plan. How the
transition of your company is structured can have significant tax
ramifications. Depending upon the deal structure of your
sale, the Internal Revenue Code will determine whether the sale
will qualify for capital gain treatment or will be treated as
ordinary income.
While no one wants to consider that they may become
incapacitated and unable to work, disability and an untimely death
are possibilities that each business owner must face Although some
of the issues are the same whether you are retiring or unexpectedly
unable to work, if you do not have a succession plan in place it
can cause a significant financial impact upon your family. An
unexpected loss of income, no experienced manager to run the
business, a possibility of key employees leaving the business and
potentially taking your customers with them and lack of cash to pay
estate expenses, such as estate taxes are all real
possibilities. It is important to dovetail a succession plan
with your estate plan. If there is no close family member or key
employee who would be able to take over and manage the business, it
may be best to have a broker or trusted advisor locate a buyer,
negotiate the purchase price and terms of sale and oversee the
business operations until the sale can be completed.
Your advisors, including your accountant and attorney, can
assist you with making decisions now that may have significant
financial impact not only on you and your family but also on your
business. A business succession plan should look to
seamlessly transition to the new management or ownership structure,
look to minimize the impact of taxes, protect the business that you
have built, provide for you in your retirement and provide for your
family in the future.
3200 North Central Avenue
. Phoenix . Arizona