Succession Planning - Family Business

When a family owned and operated business successfully transitions from one generation to the next, it is a work of art.  One of the most complex challenges facing a large sector of the American business landscape is succession planning for family businesses. Speaking from my own experience, these are emotionally charged issues, often blurring the lines between business and family. Results take time to achieve and there should be a contingency plan in place if time runs out before the succession plan is finalized. Life insurance is the great equalizer in these cases.

There are approximately 13 million family owned or family-controlled businesses in the U.S. These owners will shape an important part of the future economy. Second and third generation entrepreneurs face a more complicated world than their parents did. Technology, workforces, competition and a global marketplace are changing at remarkable speed, challenging the best leadership. Often, the founders are still involved, making the job of running a family business difficult for the successor(s) in the best of situations.

Less than half of family businesses make it to G3. Many entrepreneurs of family-owned businesses say one of their most difficult challenges is deciding who will succeed them as owners and how to preserve and protect the company's value while providing for a transition of ownership and management that complements the style and visions of each generation.

Succession planning is often done with a team of professionals that can include specialists from the law, tax, insurance and psychology fields. Estate and succession planning involve questions of law, tax and business. The issues include property ownership, stock ownership, organization and operation of the business as well as transition steps for passing that business to the next generation. 

The Plan - A Fluid, Lifelong Process

Succession Planning is a process, not an event. Once the formal Succession Plan is in place, it should be an evolving plan that is reviewed and updated to reflect changes in the business, the market, competitive conditions and the health and capabilities of current leadership. The review process is a great opportunity for ownership to deal with a variety of issues such as:

• Prospects for future leadership.
• If succession of family is not clear or possible, what other exit strategies are available? If the succession plan fails, will it lead to failure of the business or litigation?
• Transition. Are there any current physical or mental challenges?
• Business valuation & real estate issues.
• Estate and Gift Tax considerations.
• Expectations of non-family employees who may have been promised ownership or compensation for loyalty to current stockholders.
• Intra-family issues?
• Who should be included in the planning process?

Family business owners are focused on day-to-day challenges. Sometimes, other deeply personal and often dysfunctional problems come into play, preventing the eventual transfer of a very significant asset, affecting many lives. In doing so, they not only jeopardize the future of the business but also the financial security of their families.

Effective succession and estate planning establishes who will run the business after the current generation, often the owner or co-founder, either retires or dies and how their ownership will be transferred. The estate plan should include details about how the owner will pass on the business interest to surviving family members. The plan should also seek to minimize estate and gift taxes. At the same time, it should provide sufficient liquidity to pay these taxes. Life insurance and annuities are often used to cover the funding of these obligations. Done correctly, the planning takes advantage of wealth transfer strategies, gifts, trusts, and family partnerships, which can all be used during the owner's lifetime to transfer wealth to the family.

The role of life insurance.

Life insurance is often under-utilized in transition planning. As a vehicle used to minimize the impact of estate taxes and create cash for the business when it is often needed most, life insurance should be part of every succession plan. It is not a replacement for the planning done by the other professionals. The life insurance enhances the succession plan, helping to retain control and flexibility. I have seen many elaborate strategies that leave survivors and the next generation with complicated vehicles, newly formed asset protection entities and not enough cash. Life insurance should always be at the foundation of the succession plan to help the family and business through a most challenging period. It is a classic use of insurance that will help guarantee results in the event valuations are challenged, litigation occurs or if the cash position of the business is poor at the time of transfer.

If the overriding priority is the transition of a business to next generation family members, life insurance will guarantee it. Death creates uncertainty and fear. Life insurance proceeds help manage through this period. Without life insurance to provide the cash, too many things can go wrong. Regrettably, life insurance is not always supported by some planning professionals and its absence is usually catastrophic.

To make sure the Succession Plan is executed, the business owner(s) must be prepared to act without reluctance or regret. By doing so, a positive message will be sent to the next generation, the employees, the company’s partners and possibly the customers. A proactive plan made with full support of all stakeholders is always reassuring. The outgoing founders or leaders may not want a continuing role in the management of the business. For some, it is better to make a clean break. A successful transition plan sets a fixed transition date.

Tips for effective Succession Planning:

1. Be willing to discuss mortality. An effective succession plan establishes the ground rules for what will happen when you are no longer effective at managing the company or no longer have a desire.
2. As the founder, envision and embrace the long term benefits of turning over the reins to ensure and see the company flourish.
3. As the founder, establish a goal of becoming the company’s Ambassador of Good Will. Who knows this story better?
4. Have regular strategic planning meetings during the creation of the plan and forever after.
5. Create a Board of Directors who are objective and outside the family ownership circle. Consider G2 and G3 to participate in board meetings and appoint board members. 
6. Communicate with your team of outside advisors, including insurance professionals, lawyers and accountants with experience in closely held businesses, complex corporate matters and estate planning. This team will be a source of insight, continuity and support during an unexpected family crisis.
7. Keep non-family shareholders to a minimum. Everything you can do by giving stock in a business can be done via compensation plans and other ways to create a stakeholder instead of a shareholder.
8. Iron clad buy-sell agreements should be in place for all shareholders, including founders.
9. Be honest when analyzing the strengths and weaknesses of family members.
10. Be prepared for the unexpected. Most closely held family businesses without a succession plan experience a "sudden loss" of leadership due to death or disability. Who has been appointed to run the company?
11. Educate the next generation of leadership. This is a critical step that is often avoided for a variety of reasons.
12. Pre-nuptial agreements for family members working in the business should be mandatory. Divorce is very damaging to a family business. Litigation is divisive and destructive.

The Benefits of Communicating the Plan.

Many family-business owners are aware of the problems that emerge without a succession plan. The confusion and ambiguity of not knowing how or when the next generation will take over can be avoided with a carefully constructed plan. Apathy or silence won't prevent family members, key employees, customers or even competitors from reaching their own conclusions about the future of the company in the absence of a succession plan.

What you need to begin:

• Vision for the business and the family.
• Family business mission statement.
• Overview of the company's position in the marketplace that delineates its strengths, weaknesses, opportunities and threats.
• Projected revenues, earnings and net worth for the next three to five years.
• Summary of transition plan or thoughts about what it should look like.

There is no perfect time to begin the process which makes now as good a time as any. 

Please call Ted Bernstein at Life Cycle Planners in Boca Raton, Florida.