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Ten Tips for a Successful Business Succession Plan

March 1, 2016

by Vance Antonacci

Passing along a family business can be tricky business. There are a variety of legal, tax, and emotional issues that can complicate the process. A well thought out plan made far in advance of the events requiring the plan is important to the success of any family business. The following are ten tips that can help guide a family business to the creation and implementation of a successful succession plan.

1. Start early

A succession plan should be in place no less than three to five years before an owner plans to retire. A succession plan takes time and thought (and its creation should be coupled with personal estate planning), so the earlier you start the better.

2. Set clear goals

Identify managers who can succeed the owners, set rules for the involvement of other family members, and establish values.  An owner’s objective may be, “I want to work only three days a week,” or “I want to leave for Florida in the winter.” It is important that new owners maintain the culture established by the prior owners.

3. Identify your team

An experienced team of professional advisors is important. The owner should have his or her lawyer, accountant, and financial advisor identified and these individuals should be in communication with each other.

4. Plan the transition

Planning for the transition is important. The owner must determine whether to sell the business, make a gift of the business, or to have a combination of a gift and a sale. Also, the owner will need to determine whether he or she will seller finance any sale transaction (which spreads out income tax consequences for the seller but keeps the owner’s “chips on the table”). If there is financing, the amount of collateral needed (if any) will need to be assessed.

5. Determine the purchase price

How will the purchase price be determined, how will it be paid, and who will purchase the owner’s interest?  The purchase price needs to compensate the selling owner for the value created, but the price needs to be supported by the underlying financial strength of the business. The sale price can be negotiated or a valuation professional can be used.

6. Contemplate setting up a trust

The sellers or the purchasers of the business may want to set up trusts as part of the succession plan.  Generally speaking, these trusts own non-voting equity only and voting equity remains with individual owners. If properly structured, the trusts can provide estate tax savings and can provide creditor protection for the beneficiaries.

Trusts funded with nonvoting interests give family members who are not active in the business economic benefits without their interference in management.  Trusts provide creditor protection and centralized management of family business assets.  Carefully consider the selection of the trustees and their roles.

7. Decide if the real estate is separate from the business

A business owner often owns real estate associated with the business. As part of the succession plan, the owner will need to determine if he or she will sell the real estate along with the business or retain it for a source of income.

8. Don’t confuse fairness with equality

Most business owners want to treat their children fairly but this does not equate to an equal division of an estate. The owner will need to decide the extent (if any) that his or her estate plan will treat those children involved in the business differently than those children who are not involved in the business.

9. Telegraph your plans early.

It is important to openly communicate your plans to your children and top managers. The interested parties will benefit (as will the business) from having a clear understanding of the succession plan.

10. Consider a family business constitution

A family business constitution is not legally binding, but it is a guide that fosters communication and sets expectations. You can address nepotism, dispute resolution, and mission.

The importance of the early implantation of a thoughtful business succession plan cannot be overemphasized. The continued success of the business and the prosperity of the owner’s family and business’ employees depend on a successful plan. As the old saying goes, “Failing to plan is a plan for failure.”