Words: 1231
HOW TO GET "SUCCESS" OUT OF
FAMILY BUSINESS SUCCESSION PLANNING
A plan of business continuity is certainly crucial for any business and its owners. In light
of the financial uncertainty that we currently face, finding innovative solutions to grow and
transition a business is arguably more important than ever.
Business succession is a comprehensive, dynamic and integrated system of business
solutions that includes management succession, executive compensation, mergers and
acquisitions, ownership transfers, tax reduction, financial and estate planning. Each of these
dynamics should be custom designed to meet the goals and objectives of the business and its
owners. This planning is inherently complex. However, this planning becomes even more
complex when the business in question is family-owned.
There are three main objectives with succession planning for family-owned businesses.
The first is to pass control of the business to those worthy and active in the business. The second
is to provide for the financial well-being of the current business owner(s) and his or her loved
ones. The third is to treat inactive family members fairly.
Estate planning and business succession go hand in hand. Among the issues to consider
in the context of estate planning and business succession are the following:
1.
2.
3.
4.
5.
6.
7.
8.
Gifting;
Life Insurance Planning;
Equitable Treatment of Active vs. Non-Active Family Members;
Liquidity;
Wealth Preservation;
Wealth Transfers;
Trust Planning; and
Retirement Planning.
It is critical to understand and plan for the liquidity needs of a family that owns a
successful business. A good starting point is to determine the value of the business. This is key
to succession planning in general and estate planning in particular. Obtaining a valuation from a
professional valuation firm is recommended and arguably necessary. This information is critical
to life insurance planning, gifting, and strategic ownership of the business. It is also critical to
address transfer taxes that may be associated with gifts and the death of the founder.
In the context of family business succession, people issues are often in the forefront. In a
family business, communication skills and consensus building (like any other family) is often
lacking. Further, while some family businesses emphasize business values rather than family,
other family businesses are first a family and secondarily a business. If treated the same in the
context of succession planning, the results can be disastrous. In any event, the development of
communication and consensus building skills are critical. Without this, distrust can easily be
created and the odds for perpetuating the family business will greatly decrease.
In the family business context, conflict resolution should not necessarily be structured as
it might be in a non-family business context. Gravitating to a single dispute resolution procedure
may not be appropriate in the family business context. A structure that requires that the business
owner, the family, and other key personnel actually meet to discuss issues with the assistance of
family counsel or the company's board of directors is a better process than seeking relief through
mediation or arbitration which should be the last resort. Even when it comes to general business
decisions, a meeting is preferable to having actions taken in a writing without a meeting.
Unfortunately, family business plans are frequently prepared by one advisor who may not
have all of the skill sets necessary to implement a successful succession plan. For example, if
the family business plan is prepared by an advisor with estate tax expertise, the plan created is
likely to have as the primary objective the minimization of estate and gift taxes by transferring
assets, including the family business, to members of junior generations. Such a plan may have
paid little or no attention to the senior member's retirement plan or the other issues associated
with successful succession planning.
Family business succession planning requires a multi-disciplined team of advisors.
Although it is certainly important to minimize estate and gift taxes and there are numerous
transfer tax planning techniques to accomplish this, it is imperative that the retirement of a senior
family member be addressed. It is critical that the senior family member have sufficient assets to
retire without the continued support from the family business. If this is accomplished, the senior
family member will be able to "retire" in the real sense of the word. When the senior family
member's retirement and financial security are too closely tied to the business and its successors,
it will likely be impossible for he or she to ignore the business and it will be difficult to entrust
leadership to the junior generation.
Family business succession is a long-term planning process and owners of family
businesses are well served by making incremental changes to the way they do business rather
than implementing all encompassing plans. All encompassing plans are often put into effect
without the necessary input from the family and without the benefit of trial and error associated
with a long-term plan. Further, it is imperative to start the process sooner rather than later. If
succession planning is procrastinated, results can be negatively impacted by many factors. For
example, saving for retirement may be difficult or impossible. Insurability issues and other
irreconcilable issues may arise. Conflicts caused with a short-term planning process are difficult
to work out. Without long-term planning, there may not be adequate time available for the
successful implementation of the many available tax savings vehicles. Finally, to derive
harmony and to otherwise build a consensus among the family, ample time is needed for an
ongoing dialogue.
Sound business succession planning necessitates that the family agree on the criteria for
selecting the successor and only then should they focus on who, if anyone, best fits this criteria.
In some family business settings, there may not be appropriate successors. In these situations, it
may be more appropriate that the business be sold rather than have it remain in the family. In
000000.006920/#4839-5965-2355 v2
2
this regard, "selling" the business to the employees through an employee stock ownership plan
might be the best solution.
Once the people issues are successfully addressed, it is then appropriate to implement the
plan in a tax effective manner. Among the tools available are the following:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Long-term rental arrangements;
Life insurance trusts;
Buy-sell agreements;
Split dollar life insurance plans;
Grantor retained annuity trusts;
Sales to defective trusts;
Family limited partnerships;
Charitable remainder trusts; and
Employee stock ownership plans.
As you can well image, a treatise can be written on family business succession planning.
Time and space limitations prohibit me from going into this topic in more detail. If I have
accomplished anything with this article, I am hopeful that I have impressed upon the reader that
family business succession planning is a long-term and dynamic process. Succession planning is
a combination of retirement planning, estate planning, and business continuity planning.
Retirement planning relates to the financial and personal needs of the current owners. Estate
planning relates to the preservation, protection and distribution of assets. Business continuity
focuses on future needs of the business. However, all the time and effort available will not result
in a successful succession plan unless the owner and his family have the desire, interest and
commitment to move forward. If the current business owners are not ready to make that
commitment, then the reason for this unreadiness should be immediately identified. It is then
and only then that the process can begin. The sooner the process begins the better the chances
that "success" in succession planning will be obtained.
000000.006920/#4839-5965-2355 v2
3