Small businesses are the engine running the U.S. economy, helping fuel the recovery. According to the Small Business Administration 90% of all businesses in North America are family owned and managed. With the aging of the baby boomers, a significant portion of the founders of these businesses will be retiring in the next five to ten years, presenting the potentially thorny issue of the transition of leadership.
Welcome to the final installment in our three part look at Succession Planning for the Family Owned Business. In this blog we will look at how to develop a successful succession plan.
No one says it will be easy to formulate a plan, but the consequences of not having one can be dire. Too often when the significant owner of a closely held business suddenly retires or dies the result is excess estate taxes, family feuds and general chaos.
A written succession plan is vital to at the continuity of any closely held business and the happiness of the owner’s family.
So what are the elements of a good succession plan?
Selecting the successor management team. The first question is whether the future management will include primarily family members. If so, you need to consider how the business will retain, compensate and reward key non family employees. Not all family members, particularly the owners’ children, may have the capability or desire to be key players in the business. The issue must be addressed and resolved early.
Whether the next management team is family or not, training them to move into top management is a critical activity that is best done over a period of time when the current team can assist.
Timing the transfer of management power. A plan must be developed for an orderly transfer of management power. The transfer may occur before the owner retires, when the owner retires, dies or it may take place in stages.
Providing equitable compensation. In a family business, some of the owners’ children may become both key employees and owners. Others may only become owners. Addressing the issue of equitable compensation for employee-owners versus nonworking owners can prevent family confrontation later.
Determining ownership. The new owners may be family members, non-family employees, outside investors or some combination. If an honest analysis indicates there are no suitable successors in the family or company, the best solution may be to sell.
Establishing ownership structure. The decision must be made whether ownership should be divided into voting and nonvoting interest and how these should be spread among family members. The difference in voting rights offers tax and business planning opportunities.
Considering gifting alternatives. An annual gifting program may transfer wealth and future value appreciation of the gift to heirs and may also remove property from the estate, thereby reducing taxes.
Using multiple entities. Separating the business into more than one entity can create different ownership possibilities as well as provide income, estate and gift tax planning opportunities.
Deciding when to transfer ownership. Will ownership transfer during the owners’ lifetime or at their retirement or death? Is a sale or partial sale a better solution?
Succession planning smooths transition and minimizes business disruption upon the exit of a significant owner. Taking the time to carefully consider all the aspects of the business and personal implications now will help avoid chaos and consternation later.
If you have would like to talk to an advisor about your succession plan, please contact Frazier & Deeter. Our expert advisors can help you understand the various financial implications that pertain to your unique situation.