SEG1
hp

Get insider deals, exclusive promotions and more delivered right to your inbox.

Labor Day Sale
http://static.www.odcdn.com/images/us/od/lb_loading.gif
Planning for Succession

When a small business is a key component of family wealth, the owner usually has a strong desire to perpetuate it in one form or another. But perpetuating the business through an orderly succession to family members or other insiders is the ultimate management challenge. The owner(s) must deal with business, family, tax, and estate issues when planning for the succession of both management and ownership.

Any transition of an ongoing business must preserve the continuity of leadership. Therefore, it is critical that the succession of ownership and management be perceived as a process rather than an event. As as some successors (or owners) might hope otherwise, it's not a matter of deciding to retire at 4:00 p.m. next Tuesday at which time Junior will take the reins or your partner will become the boss, while you'll fade into oblivion (or more likely onto the 10th tee). Succession is a process requiring planning, teamwork, and constant re-evaluation.

Planning for succession in a family business is a special situation of the first order. However, it is so seldom done successfully that barely 30 percent of family businesses survive into the second generation and fewer than 15 percent of them endure into the third. This is a sad fact, not only for the families, but for the nation's economic health, since much of our economy is made up of small, family-owned businesses. If the business of succession is not done by process (through planning), it will be done by crisis (a failure to plan), with perhaps disastrous results.

You may decide to take the external route, selling the business (depending on how it's organized) to your employees (via an ESOP), to your competitors or other third party (outright), to your partners (via a buy/sell agreement), or to the public (via a stock offering). However, for purposes of our discussion here, we'll assume that part of your overall plan for preserving your personal wealth is to pass your business on to your progeny, taking the internal path to keeping both the wealth and the business you worked so hard to build "in the family."

A typical succession plan has two elements, which should be considered separately:

  • the transfer of power, whereby control over the business's operation is transferred to those best suited to exercising it
  • the transfer of assets, whereby the wealth concentrated in the business is transferred to designated family members, who may be a different or larger group than the person or persons who will be assuming power.

The former is an art, the latter a science.