Advance Planning Makes Business Succession Easier

(Originally published in The Business Journal)

Business founders spend their lives building up their businesses but often fail to plan for succession. 

This failure to plan can invite unfavorable consequences for the owner’s financial picture, his or her family, the business itself and its employees.

Owner’s Finances

The failure to plan ahead for business succession can be devastating financially, especially in terms of tax consequences. Small business owners often have a large part of their net worth tied up in the business, and often depend on that for retirement income.  Without planning, they can lose much of their nest eggs.

So owners need to consider, in advance, what they can do to minimize income and estate taxes.  They should also make sure an orderly transition provides for financial security for the owner and a spouse during retirement years.

Owner’s Family

In the event of a business owner’s death, family members may be forced to deal with significant business and tax problems during a time of grief.

The owner’s family members may not adequately be provided for. Also, family members may also be incapable of running the business. Worse, capable family members may wind up restrained by incapable family members, resulting in feuds.

If a business owner desires to transfer ownership of a business to selected family members or to equalize transfers to children, a plan for that needs to be worked out. 

It may be very important to the owner to make sure the plan promotes family harmony. 

One important aspect to consider is the involvement, capabilities and interest levels of family members.  It needs to be determined whether or not there are non-involved family members interested in a family business. 

The capabilities and interest of key employees are often also considered closely.   

The Business

A lack of planning could also harm the business itself.  The business may need to be liquidated, or let go in a “quick” sale if there has been no plan developed for a more prudent transfer.  In such a sale, the character of the business may change or the business may need to be relocated.

The business owner should look at the feasibility or sometimes necessity of a sale of the business as a succession strategy, and plan for that. In some situations, the sale of the business is the best option.

For one, a sale may be the best way to obtain optimal value for the business. There may be a lack of commitment from family members, or there may be no competent successor.  The risks of failure from keeping the business in the family may be high.

Employees

Finally, a lack of planning could affect the company’s employees.  Some may wind up unemployed. Loyal and capable employees whom the owner may have intended to be involved in the business may be kept from involvement.

An owner may want to provide job security for employees, and will need to plan for ways to encourage that.  Another goal may be to provide for the transition of management responsibilities. Another could be to ensure the continuation of the business.

A good business succession plan considers the owner’s most important goals and objectives.  Part of the process is choosing among priorities, especially if time is limited.

The best succession plan for one business owner is likely to be very different from the best plan for another.  The necessary steps are to consider the options and to follow through on the planning.

Business founders who spend their lives building their businesses should take the time to meet with the appropriate advisors to get a plan together.  Trusted advisors can help set up a succession plan that meets their goals and objectives for the owner, family members and the business itself.

L’Italien can be reached at slitalien@hhmlaw.com or at (330) 337-6586.