Business Succession Planning

You’ve poured your heart and soul into building a successful business. It’s more than just a paycheck; it’s a legacy you want to pass down for generations to come. But what happens when it’s time to step away?

Unfortunately, many businesses falter during ownership transitions. Unexpected events, a lack of planning, or even family disagreements can disrupt years of hard work. This doesn’t have to be your story.

What is Business Succession Planning?

Business Succession Planning is the proactive process of preparing for a smooth ownership and leadership transfer in a business. Ideally, the business is passed on to a family member or another entity while maintaining or increasing its value. This ensures minimal tax implications and minimal disruption to daily operations.

So, every business has to change ownership at some point, and whether or not it survives such a change often depends on its succession planning.  Business succession planning is the process of preparing for a transfer of the business to another person (often a younger family member) or a business entity. The main objective of the business succession planning is to transfer the business to a third party in a way that maintains or even increases the valuation of the business, minimizes tax liability, and minimizes the disruption of the business operations.

Why Family-Owned Businesses Need Succession Planning

Many family-owned businesses struggle with unforeseen events like retirement, illness, or death of a founder or key partner. Divorce or disagreements between partners can also lead to business disruption. Without a well-defined succession plan, these situations can destroy a thriving family legacy.

Challenges of Family Business Succession

Succession planning for family businesses is complex and requires careful consideration. Unlike common belief, it’s not a quick or automatic process. Transitioning ownership and leadership to the next generation or an outside buyer can be emotionally charged and requires significant financial planning.

Unlike large corporations, family-owned businesses often fail because their founders or senior-level partners retire, become incapacitated, or die.  Problems can also arise when the founder or one of the partners gets divorce or partners no longer get along and decide to part ways.  Without thorough planning, any of these events can destroy an otherwise successful family-owned business.

A business succession planning, however, is fraught with challenges and confusion. Contrary to a popular belief, this is not a process that happens naturally, quickly, or without thorough planning. The succession of a family business to an unrelated buyer or the next generation often requires significant financial and emotional commitment, can leave family members feeling uneasy, vulnerable, and prone to conflict.

Benefits of a Strong Succession Plan

A well-structured succession plan offers numerous benefits for your family business:

• Ensures Business Continuity: A clear plan minimizes disruption and ensures the business continues to thrive after ownership or leadership changes.
• Preserves Family Legacy: Proper planning allows you to pass on your family’s business values and traditions to future generations.
• Minimizes Tax Liabilities: Strategic planning can help reduce tax burdens associated with ownership transfer.
• Reduces Family Conflict: Open communication and a defined plan can minimize disagreements and emotional turmoil during the transition.

The Three Pillars of Succession Planning:

A comprehensive succession plan addresses three key areas:

1. Transfer of Ownership & Economic Interest: This involves outlining the process for transferring ownership shares and ensuring financial security for outgoing owners.
2. Leadership & Management Transition: Identifying and training the next generation of leaders to ensure smooth management continuity.
3. Financing the Transition: Developing strategies to finance the ownership transfer, such as buy-out agreements or life insurance policies.

Steps to Develop a Family Business Succession Plan:

Choose Your Business Successor – If you don’t have a family member who is able and willing to take the reins of your business.  You may start by looking within the business organization, examining current senior management who may have the right leadership skills.  In some circumstances, current employees of the business may be willing to buy-out the business from the owners.  Privately-held family businesses will benefit from the engagement of the third-party consultants, who can provide guidance during such emotional period. This process should begin at least 5-10 years prior to a planned retirement.

Develop a Formal Management Training Program – First, you need to identify some of the most critical functions of the company and have your successor(s) work in each of these areas. It’s not enough for your successors to understand the executive responsibilities, they need to be able to step-in and lead the organization when the time comes.

Establish a Reasonable Timetable – Determine how and when control of the company will be shifted to your successor.  It should be noted that the company’s ownership and management of the business may be transitioned to the successors at different times.

Execute the Succession Plan – If you have made the proper preparations, the execution of the business succession shall be relatively simply process. Businesses whose owners install their successors during their lifetime typically have a much smoother transition and the greater chances to preserve the success of the business for the future generations.

Protect Your Family Business Legacy

Contact Lexern Law Group today. Our experienced attorneys can help you develop a comprehensive succession plan tailored to your unique needs. Let’s ensure your family business thrives for generations to come.

There are many different strategies and options for succession planning. The following four general steps for developing a succession plan provide a good road map for the process:

Contact us to see how we can help.