Succession Planning: Preparing The Next Generation To Lead Your Business

by David C. Hepple

Thinking ahead is a cardinal rule of business. In addition to monitoring the daily operation of your business, you need to think about the future. And, as difficult as it may be, it’s important to envision the day when you no longer will be in charge. You leave your heirs and your business vulnerable to considerable estate taxes and management upheaval if you don’t plan ahead.

Recent surveys provide some alarming statistics. Only one percent of family-owned businesses in North America reach a third generation with family members running them. Another report shows that 30 percent of all family-owned businesses have not considered a successor, with only 63 percent having done so when the owner has already reached age 65. Finally, another recent survey shows that more than 58 percent of small-business owners list inadequate succession planning as the biggest threat facing their business.

Given the fact that 90 percent of the 18 million-plus businesses in America are family-owned and managed, it's obvious that a solid succession plan will be important should the majority owner die, become disabled or retire.

Handing it all down

Typically, succession planning entails three steps: a decision-making stage (choosing a successor), the gradual transfer of minority stock holdings and the transfer of ownership and management responsibilities to the successor.

In choosing a successor, don’t force a member of your family to assume unwanted responsibilities. First, find out whether he or she is willing and able to assume the role. If so, make sure you are in agreement that a moderately paced transition will provide the best environment for the company’s bottom line and overall stability.

Throughout deliberations, you might even find that the burden of managing your business requires the skills of a professional with few or no ties to your family. If such a person is already in your employ, his or her ascent to leadership may prove more advantageous to the business than carrying on a "family tradition."

Most experts in the field of succession planning suggest using these steps to pave the way for a suitable successor:

• Set a target date as your last day with the company and start shifting responsibilities ahead of time. You want to be able to oversee the transition while you're still there.
• Set standards that take into consideration the needs of your successor.
• Decide whether to offer stock to retain key employees after the transition.
• Provide for buying out a family member's stock, if necessary.

Poor planning

Failure to reach a suitable line-of-action or consensus among all parties involved with an impending succession can be disastrous. Holding down future estate taxes is another priority that needs to be dealt with while you're alive and well. Your death may trigger a huge federal estate-tax bill that might force your family to sell the business merely to pay the IRS. Many business owners have no idea that tax liabilities and estate settlement costs can run as high as 60 percent of their assets.

But, through careful estate planning, the cost and complications resulting from years of probate, etc., can be minimized, and the transfer of power can be assured. Often, life insurance is needed to provide the necessary liquidity to pay estate settlement costs.

Choosing the right method of passing on your closely held company can not only save you tax dollars, but can also provide an added dividend --peace of mind. It is important to consult your own tax advisor and lawyer when setting up this type of arrangement.

David C. Hepple is with Equitable, Member of the Global Group. He can be reached at 410-347-1006.