When a family owned and operated business successfully
transitions from one generation to the next, it is a work of art. At the risk
of using one of the more overused euphemisms of the day, it truly takes a
village. Each time I have the benefit of witnessing successful execution, I am
struck by how many people worked hard for a sustained period of time, sacrificing
for the good of the business and for family. One of the most complex challenges facing a large sector
of the American business landscape is succession planning for family businesses.
Speaking from personal experience, these are emotionally charged issues, often
blurring the lines between business and family. Results take time to achieve
and there should be a ready contingency plan in place if time runs out before
the succession plan is finalized.
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, when they founded and built their businesses. 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 should be done with a team of
professionals that include specialists from the law, tax, insurance and when
necessary, the industrial psychology field. Estate and succession planning
decisions involve questions of law, tax and business planning that will focus
on the types of property to own, stock ownership, and the organization and operation
of the business as well as steps for passing that business to the next
generation. I have often found that Trust companies such as The Northern Trust
have professionals with great experience in the family planning process.
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 the 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 owner or co-founder retires or dies and how
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 at great cost to
successful transition planning. As a vehicle used to minimize the impact of
estate taxes and create cash for the business when it is needed most, life
insurance should be part of every business succession plan. It will not replace
the planning done by the other professionals doing everything reasonable to create
a workable plan to minimize tax while allowing the family to retain control and
flexibility. I have seen many plans with elaborate strategies that leave
survivors and the next generation with clumsy vehicles, newly formed asset
protection companies and not enough cash. When these complex and expensive
strategies to reduce taxes and protect assets are implemented, life insurance should
always be in place to support guaranteed outcomes. This is a classic use of insurance
that will guarantee transition results in the event valuations are challenged,
litigation occurs or if the cash position of the business is poor at the time
of transfer.
When the overriding priority is the transition of the
business to next generation family members, life insurance will guarantee it.
Death creates uncertainty and fear. Life insurance proceeds help manage through
this period by ensuring that the planning will become a reality. Without life
insurance in place to protect against the loss of the key person and guarantee
the cash required to execute the stock transference plan, too many things can
go wrong. Regrettably, life insurance is not always supported by all members of
the planning team and its absence in the plan is usually catastrophic.
Once a Succession Plan is firmly in place, the business owner(s)
must be prepared to execute the transition without reluctance or regret. By doing
so, a message will be sent to the next generation, the employees, the company’s
partners, vendors and the customers that this is a proactive plan made with
full support of all stakeholders. The outgoing founder(s) may or 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
with a strong and independent team of advisors in place to support the new
generation of leadership.
Tips for
effective Succession Planning:
- Nobody
enjoys discussing mortality, but 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.
- As
the founder, envision and embrace the long term benefits of turning over
the reins and seeing the company flourish.
- As
the founder, establish a goal of becoming the company’s Ambassador of Good
Will. Who knows this story better?
- Have
regular strategic planning meetings during the creation of the plan and
forever after.
- Create
a Board of Directors who are objective and outside the family ownership
circle. Allow G2 and G3 to participate in board meetings and appoint board
members.
- Communicate
with your team of outside advisors, including lawyers and accountants who
have experience with closely held businesses, complex corporate matters
and estate planning. This team will be a source of insight, continuity and
strength during an unexpected family crisis.
- Keep
non-family shareholders to a minimum. Everything you want to do by giving
stock in the business can be done in other ways, via compensation plans,
to create a stakeholder instead of a shareholder. And, if for some reason
that cannot be done as neatly in your business, err to the side of not
giving stock to non-family members.
- Iron
clad buy-sell agreements should be in place for all shareholders,
including founders.
- Be
honest when analyzing the strengths and weaknesses of family members when
considering successors and the final succession plan.
- 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, leaving behind children or spouses who are too young
or too inexperienced to manage the business effectively. Is there a plan and
who is aware of it? Who has been appointed to run the company?
- Educate
the next generation of leadership. This is a critical step that is often
avoided for a variety of reasons.
- Pre-nuptial
agreements for family members working in the business should be mandatory.
The threat of divorce can be very damaging to a family business.
Litigation is divisive and destructive.
The Benefits of Communicating the Plan.
Many family-business owners acknowledge the problems that
can emerge without a succession plan but find it difficult to create and
implement one. The confusion and ambiguity of not knowing how or when the next generation
will take over can be avoided. 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.
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.
The value of a business succession plan goes far beyond
transition. The process will identify strengths and weaknesses that might
otherwise be neglected. There is no perfect time to begin the process which
makes now as good a time as any. Please call Ted Bernstein at Life Insurance Concepts in Boca Raton, Florida.