As a general definition, succession planning is the process of preparing to hand over control. Specifically, business succession planning is the process of preparing to hand over control of the business to others in a way that will minimize the disruption and negative impact to the operations and value of the business. Having a formal, written business succession plan facilitates effectuating these goals. Business succession planning should be a priority for every business, especially when the business is closely held by a family or families.
Who’s going to manage the business when you no longer work the business? How will ownership be transferred? Will your business even carry on or will you sell it? What happens if a partner wants out of the business? Or worse yet, what happens when you or the partner passes away unexpectedly?
Business succession planning seeks to manage these issues by setting up a smooth transition between you and the future managers and owners of your business. With family businesses, succession planning can be especially complicated because of the relationships and emotions involved – and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs. Succession planning becomes even more complicated when multiple families are involved.
Many family-owned businesses do not survive the transition from founder to second generation. In most cases, the downfall occurs due to taxes, family discord, or even discord between multiple families that have management and ownership interests in the business – all issues that a well structured business succession plan will cover.
Business succession planning can be broken down into three main issues: management, ownership, and taxes. It’s important to realize that management and ownership are not necessarily one and the same. You may decide, for instance, to transfer management of your business to just one of your children but transfer equal shares of business ownership to all your children, whether they’re actively involved in operating the business or not.
The taxes component of succession planning looks at the minimization of taxes upon death. There are asset transfer tax strategies that will help you do this, such as freezing the value of your interest in the company while you transfer ownership to your children. Business succession planning should certainly be considered when establishing one’s overall estate planning, as many of the moving parts overlap. Our tax lawyers who are also Certified Public Accountants (CPA) have experience with the complexities of business succession planning, and will provide invaluable advice about various tax strategies that may be utilized.
Finally, for many family businesses it is the “family” that is the primary emphasis of and motivator for succession planning. Whether you’re thinking about the future management of your business, how ownership is going to be passed down, or the potential impact of taxes on a transfer of ownership, the decisions you make now (or fail to make) will affect your family. If you want to pass your family business along to the next generation in tact, putting off business succession planning is the worst thing you can do. A good succession plan can ensure that you have the funds you need to retire and that the business you have built continues to thrive in the hands of the next group of managers and owners.