Posted On Jul 30, 2015
You may be one of those business owners too busy being successful to think about succession planning. Nonetheless, it is folly not to plan for your succession, and your strategy should follow the old adage of “hope for the best and plan for the worst.” Assuming the worst – that you would unexpectedly leave the business tomorrow – do you have plans in place for transition in management, what happens to your ownership interest, and how to use your stake to provide for a spouse and family members?
Take for example, the unexpected and tragic deaths of 47-year-old Survey Monkey CEO, David Goldberg and Edward Gilligan, president of American Express, who was 55. While sudden and certainly a setback for their respective companies, their leadership teams had structured and detailed transition plans in place that have allowed business operations to continue without financial interruption. And while these are large, international businesses, there are lessons for businesses of all sizes when it comes to successful succession planning.
Identify your goals
There are many business owners who love what they do and have no plans to retire – ever. That’s OK, but it doesn’t mean you don’t have to plan. Whether you retire at 50 or are carried out of your office at 100, you eventually will leave the business.
Key questions are whether you want the business to continue with family members in charge, or if you want to sell your interest to provide for a spouse or other family members.
Not addressing this question has consequences. A spouse who depended on the income you earned from the business may now be left with an ownership interest that provides no direct income and is difficult to sell. Family members who have different goals may squabble. Other investors or business partners may have goals that don’t align with your desire to provide for your family.
Have “the talk” with family members
In a family business, the first consideration always is whether there are those in the family’s next generation who have the desire and skill sets to take over the company’s leadership. This is the moment for a frank discussion. If your children want to liquidate their interest in the business, it’s better to know now while you can make plans that satisfy everyone’s objectives.
Knowing both your children and the business, you’ll have to make the hard decisions about the roles they should assume. You may be able to leave one child your share in the business while you leave other assets to a child who wishes to go his or her own way.
Price your business
Selling your interest in the business to a partner or family member will be easier if you set up a mechanism in advance to determine the price. As in any transaction, buyers and sellers can have wildly different expectations of value, and hurt feelings – or even litigation – can be the result. Setting an actual price in advance probably isn’t realistic, but you can outline the process for determining the price.
For example, you could designate an accounting firm with valuation experts in your industry to determine the price. You can also use formulas that consider revenue, profit, capitalization and other factors, but be careful. A formula that works in today’s market may not work so well next year or in 20 years when the dynamics of your industry have changed.
Consider a family limited partnership
One succession vehicle that is gaining in popularity is the family limited partnership. The FLP allows a business owner to annually gift an interest under the annual exclusion threshold in the partnership that holds certain assets – the family business, real estate or other assets – without incurring a federal estate tax. The business owner can control the partnership as a general partner, either individually or as a closely held corporation, while other family members are limited partners without decision-making authority. Additionally, FLPs have other tax advantages.
Your attorney can explain the details of an FLP, as well as different types of trusts and other arrangements, and whether they are appropriate for your situation. Before you explore these options with your attorney, begin the process by identifying succession goals for your business, and accept the idea that succession planning is nothing more than a risk management strategy for you and your family. Rid yourself of the risk of unplanned succession.
If you want to read more about preparing your business for the future, my colleague Mike Roberts authored a blog post titled, “Don’t Allow Your Business to Become a Victim of the Dreaded Ds.”