Business Secession Planning Primer

We work with many clients who start to think about business secession planning. with both experienced estate planning and business attorneys here at the firm, we are able to assist clients in managing this process. This is a good article for things to begin to think about when you want to start to create a succession plan. This article is about a presentation to contractors, but it can apply to almost any business.


In Need of a Succession Plan? Here Are the Basics
American Chronicle

Have you been at the helm of your company for longer than you can remember? Do you know who will succeed you and how? Well, the experts say these are some indicators that you need to start thinking about succession planning.

While the prospect of the loss of control probably produces anxiety for you, you undoubtedly recognize the need for planning not just for your own future, but also for your employees' future as well. Shannon Affholter, a senior managerof the construction and real estate group of the accounting firm Moss Adams (Shannon.offholter@mossadams .com) and his colleague, Glenn Wattum, CPA (also of Moss Adams) presented a session at the Construction Financial Management Association's 2009 Annual Conference on succession planning for contractors.

CBMR spoke with Affholter to focus on how to get started and what is involved in the planning process. Affholter says that succession planning is an important business issue because approximately 60 percent of family-owned businesses will be changing hands in the next 10 years.

Thoughts of succession planning in the context of a family business conjure up images in my mind of the fights between J.R. and Bobby Ewing on the television series Dallas for control of the family oil business and actual "discussions" I have had with my brother and my dad (our company's president) in our company's conference room. Although we all get along well and are fairly unlike the Ewing family, power issues frequently bubble up especially when we discuss our company's long-term plans. The issues presented by a change in the business leader in a family business are often sensitive. What should happen if the company president becomes incapacitated? Which child (or should any of them) be in charge? Should the children be treated equally? Will the employees stay on with someone else as leader?

Before heading to your lawyer or accountant for planning services, it is a good idea to get a handle on the components of the process and to start thinking of the answers to some of the tough questions you'll be confronting along the way.

Affholter points out that succession planning involves more than who is next in line to take over. It has five components that need to be integrated and are interdependent. The components are business planning, ownership transition planning, succession planning, estate and tax planning, and personal wealth planning.

Business planning. This is the strategic plan that identifies where you want your business to be. It is the time to identify your long-term goals for your business. Do you want to perpetuate your business, cash out for the best possible value, or a . combo? While these are not the only options available, you need to establish what your goal is.

Ownership transition planning. If you are considering perpetuating your business, identifying viable candidates to succeed you is elemental. You will need to establish in your own mind what skills the successor needs and what level of competency is required in each. The skills you are likely evaluating are overall business competency, commitment, personal character, and leadership ability.

Frequently, the owners of family businesses begin looking at their children or other family members as their first choice for their successor. Affholter cautions that you should objectively look at the family member's skills to see whether he or she will be able to fill the role of leader. It may be difficult for you to accurately assess the person's real strengths, weaknesses, and potential. It may be helpful to have an outsider evaluate them. Affholter suggests seeing whether additional training or outside experience will get the family member to the level needed to fulfill the company's needs. It is really going to be a hard sell to your current employees to get them to respect and follow a family member who has little experience and placed at a high level in your company.

In my company, the rule of thumb seems to be that the family employee needs to work twice as hard as nonfamily employees to garner the respect of long-term employees. Your employees are looking for the same traits and confidence in your family member as they see in you. If his or her ability is not close to yours or his or her leadership skill is not readily apparent to your employees, your employees will be hard to motivate.

If you don't think you have good candidates from within your company or your family, consider a strategic hire. At this point, a tremendous amount of high-quality talent is available for hire in the industry.

If your timeline is long enough, you might consider having an in- house development program that rotates potential leadership candidates through various departments in the company, Affholter suggests.

Ownership transition planning also includes looking at how your economic interest in the business will be handled. You will need to consult your tax counsel on the most advantageous way to address this. There are quite a few options for intrafamily business transfers Affholtersuggests investigating. Some of the options include creating a limited liability company where you can establish membership interests and transfer business assets now rather than later and having a buy-sell agreement that pre-establishes purchase price and sale terms for a transfer in the future. I have also seen other owners who decided they did not want to sell their company to a third party and had no family members who could be appropriate leaders use an employee stock ownership program (ESOP) to cash out equity in their business and transfer ownership to their employees.

Management succession planning. This is the road map for read/ ing your business for your departure or readying your successorfor his or her new leadership role. If you are going to sell your business, then the plan needs to include steps and a process for making your business an attractive purchase.

If you have a successor in mind that needs additional experience or knowledge, the plan will set out the method for supplying the experience.

Personal wealth planning. In many cases, the answer to the question "What will be your monetary needs in retirement?" will determine significant elements of your business and ownership transition plan. So be prepared with at least a general answer to the question before approaching your counsel or advisor to do your succession plan.

Estate planning. The estate planning component involves developing a strategy that minimizes your estate tax burden. The strategy will have to dovetail your business plan with your other assets and your goals for the distribution of your assets upon your death. Before pursuing an integrated strategy, you might consider consulting with a tax attorney to see what options and choices you should be exploring in fashioning your overall plan. Expect that the estate planning component will involve at least your accountant and a tax attorney.

Affholter suggests that accomplishing a comprehensive succession strategy either with one professional or multiple professionals generally takes a few years. The final succession plan, Affholter cautions, often has to be fine-tuned, or modified as circumstances change.

Copyright Institute of Management & Administration Aug 2009