What would happen to your business today if you suddenly died or became disabled? How do you plan to retire? Do you plan to transition ownership and management to relatives or close members of your company’s “family”? Perhaps you plan to hire your own replacement, or maybe sell the company outright. We can help you plan now for how you want your company to evolve after you stop working.
Family business experts estimate that approximately one-third of family businesses will survive to the second generation, 12% will survive to the third, and 3% will still be viable in the fourth generation and beyond. This proves that whether you plan to retain or sell your business at death, disability or retirement, you need expertise to help you structure an arrangement to maximize the tax and financial benefits to you and your family. We are specialists in business succession planning strategies and will work with you to develop strategies that maximize control if you wish, while still allowing the business to smoothly transition whenever you choose.
Keys to Unlocking Value
All businesses, from the three partner law firm to the family-owned car dealership and public biotech company need to develop, implement and monitor a coordinated strategy which incorporates one or more of the following elements of business successful planning:
- Current buy / sell agreement
- Tax and cost efficient funding
- Up-to-date business valuation
- Key person life & disability insurance
- Coordinated estate and gift plans
What’s your business worth?
Our business valuation services can help you analyze and determine the value of your business in connection with transitioning ownership, or in other situations, such as handling estate and gift tax issues, bankruptcy or reorganizations, litigation, divorce, or partner disputes.
A buy-sell agreement that clearly sets out the value of your business and your intentions for transferring ownership is critical to the succession planning process, as is a funding mechanism to implement the agreement.
Why Families Don’t Retain Their Businesses
There are two common reasons why a family does not retain their business. The first reason is straightforward – there is no qualified successor. However, even though these businesses will not be passed down to the next generation, you can still take steps to ensure that the value of your business survives, which is really just another form of succession planning.
The second major reason for unsuccessful business transitions is more unfortunate. In many cases, businesses fail or are sold off due to a lack of planning. Although most of us are careful to safeguard our personal assets, for example by insuring our homes, many businesspeople do not plan ahead to safeguard the value of their business. At first glance, this lack of planning seems incomprehensible. But, when you look at the personal and family issues that are involved, it is easy to understand why many people just don’t want to deal with the issue of business succession.
For most business owners, their business is their single largest asset in terms of value, but it also represents a major source of self-esteem and personal worth. Consequently, many business owners don’t want to think about the day when they will no longer be running the business. In addition to the fear of retirement, the business succession process must invariably deal with the business owner’s death. This issue is difficult for all of us to deal with, as evidenced by many surveys showing how few of us have prepared a will. Finally, for those individuals making it past the first two succession planning hurdles, there is one more tough decision that is easy to put off – how can I pick one child as my successor while being fair to all of my children?
These are difficult issues to deal with. Consequently, planning for your succession will, by necessity, be a process rather than an event, as it will take time to address these issues. Also, given that most of the major decisions to be made are of a personal nature, the process used to manage each family’s business succession will vary depending on the nature of the family issues involved. Consequently, there is no one approach that will work for all business owners.
What Happens if I Can’t Identify a Successor?
You may decide that succession within your family just won’t work. For example:
- None of your children is either interested or capable.
- A child has the potential to succeed you, but is not yet ready.
- You have children who are equally interested and capable, but you feel selecting one child over others is not worth the risk of disharmony within your family (or your potential successor may not want to take on the job, given the feelings of the other children).
If you find yourself in this position, there are still some options:
- Sell the business. After all the issues are considered, the best option may be to simply sell the business, either to third parties, or perhaps even to your employees. An important point to keep in mind is that dealing with succession was helpful as it allowed you to make a clear decision about the future. Once you have decided that a sale is the best alternative, you can make plans about how and when to sell, so that you maximize the value of your business. You can then set an estate plan around the proceeds you will receive from the sale of your business. Passing on the business to new owners is really just another form of business succession.
- Split the business. If you own a larger business that is involved in several different activities, splitting the business into autonomous divisions may allow you to deal with the issue of selecting among equally qualified children. Also, it will allow you to assign each division to the child best suited to deal with that specific part of the business.
- Use an interim chief executive. If you feel that a child will eventually become a qualified successor, an interim leader can help keep the business going until the child is ready. The leader can also act as a mentor to your child as he or she prepares to take over. There are a number of points you’ll need to keep in mind, however:
- Although your family will not be involved in day-to-day activities, you still need to establish a management structure within the family to monitor the business and to oversee important business decisions.
- It will take a unique individual to fill this role, as they will need a wide variety of skills including strong leadership ability along with a willingness to step aside when the time comes.
- You will obviously want to have complete trust in this individual, as you are giving them a significant amount of control over a major family asset.
- As the interim leader will likely not have a stake in the business, the individual will expect to be well paid for their services, perhaps with the use of performance bonuses and other incentives designed to give some of the benefits of ownership.
- As we discuss in the next section, retaining key non-family employees is important in any succession plan, but it is especially important if the business will be controlled by an interim leader. The leader will need the skill and experience provided by these employees. Consequently, creative remuneration systems and bonuses may be appropriate for key employees, as well.
- Take the company public. Another option that may be available for larger businesses is a public share offering. Taking a company public provides three main advantages. First, the potential market for shares of your company will be greatly increased. Second, the shares of many companies are worth more immediately following a public offering when compared to the value of the shares when the company was private. And finally, a public offering allows a much higher degree of flexibility for estate and tax planning, as you can sell your shares in smaller blocks over time (which is difficult for shareholders of a private company). You should keep in mind, however, that taking your business public is more of a process rather than an event due to a number of compliance issues that must be dealt with. In addition, the process can be costly.