The one thing that many business owners learned from the Covid-19 pandemic is that no matter how stable a business is, it can quickly close or go bankrupt if the right set of circumstances present. Within a span of two years, the Covid-19 pandemic knocked down hundreds of thousands of businesses, many of them permanently. Most had no family business succession planning for the future.
Today, many family business owners do have some idea of what they want to do with their business in the future, but most still never make any concrete plans. They keep putting off making those decisions. When illness, disability, or death strikes unexpectedly, however, there is more chaos. More than ever, it is important for owners of family-run businesses to consider family business succession planning if they do not plan to sell the business.
SUCCESSION PLANNING STRATEGY
Succession plans are designed to be a planned exit strategy or a business strategy to ensure that a business survives and continues to prosper even though the previous owner is no longer in charge. The previous owner may have retired, decided to change careers, become disabled, or may have died. Creating a succession plan, though, requires a great deal of work and effort. If you simply decide to transfer your business to a family member overnight, this can turn out to be a major risk. Any number of scenarios could exist, such as … perhaps the family member was not ready to run a business, or did not have the right skills, or the family dynamics lead to hostilities that eventually lead to the closure of the business.
In order to facilitate a hassle-free transfer of the business, family business succession planning should be done as early as possible but know that it is never too late to start the endeavor. The critical thing is that your successor has to be vetted to make sure that he or she has the right attitude and skills to run a business.
THE PROCESS OF SUCCESSION PLANNING
In reality, a succession planning family business ensures that a successor has been selected to take over your business. It may be that the owner may want to change careers, or suddenly becomes ill or disabled, or passes away. If there are no successors in line, the business may need to close. To prevent instability in a business, it is important to have a succession plan. Succession planning helps maintain your long-term legacy, but, in addition, it defines which of your family members will take over the business, who will serve on the board, how the profits will be distributed, and other matters, like liability, taxes, estate planning, and ownership stakes.
To start an effective succession planning family business, you first need to understand your family dynamics and how they will play a role in your business. Remember not all family members may want to follow in their parent’s business and some may not have the right skills or character. More than ever, younger people want to enter a career that is different from their parents. Thus, in order to develop a successful succession plan, you need to consider the following:
- First, appreciate the fact that the transfer of a business even to a family member requires a formal plan.
- Start as early as possible because it takes several years to create the plan. Succession planning is not an overnight endeavor, and it requires a lot of time and effort. It is a process that has to be reviewed each year because both business and family circumstances may change over time.
- Have an open discussion with your family about your business goals. Once you have input from the family members, you have less chance of friction when it comes to deciding who will be the successor. The chance to participate in the business should be an option and not an obligation. It may take several family meetings to determine who is best suited for the role of your successor and what other skills he or she will need to have to succeed.
- Get an independent valuation of your business; this is important if you want to be properly compensated when leaving the business.
- Once you have selected your family member(s) to be your successor, you will need to train them and provide them with the skills needed to run a business and how to be a leader.
- Explore options for the transfer of the business.
- Discuss the amount of compensation and/or shares you will receive upon transfer.
- Communicate openly with everyone concerned, including your shareholders, high-level employees, and family members.
WHAT ARE THE ADVANTAGES OF SUCCESSION PLANNING?
The long-term benefits of family succession planning include:
- Your child or children will be taught the skills and management tasks necessary ..to run a business.
- The children or successors will be able to make well-informed decisions about the company’s future.
- Your legacy can continue.
- You will be provided with an income or some type of monetary benefit even though you are no longer the owner.
While family business succession planning has several benefits, some challenges come with it also and including the following:
- First, the owner has to decide which child or children will run the business. It could be that none of the children are interested and want a different career. As well, not all children will have the same business skills or interests.
- Succession planning of a family business can be challenging, depending on the family dynamics. The key is to start planning early so that all issues can be resolved. A stable family background is essential for the business to survive. If the family dynamics are turbulent, the business will most likely not survive.
- Even if you select a family member to be your successor, will the individual keep on running the business and remain committed or sell it shortly afterward?
- Failing to consider the tax and legal impacts of the various transition options.
- If you offer unequal shares of the profits to children, this can result in litigation and hostility.
- By excluding any financially successful children/relatives by not including them in the transfer of ownership, you can grow ill will.
CONSULT WITH THE EXPERTS
Creating a successful family business succession planning strategy for your family business will require consultation with various professionals, including your tax advisor, accountant, and attorney. This is not a project for you to tackle individually. You will need sound advice and consultation with experts. Elder Law, P.A. is clearly an excellent choice because of our outstanding reputation and experience with family business succession planning. Call us today at 1-561-933-4728.
It is also important to note that you should not simply forget the succession plan once it has been created. Experts recommend that you revisit the succession planning of your family business every 12 months to ensure that there have been no changes in the family (e.g.. deaths, disability, divorce) and that you are up to date with the current tax laws.