Business succession planning refers to the use of estate planning strategies to implement a survival plan for a business in the event of death or illness. Succession planning is vitally important for all business owners, but particularly family business owners. It is estimated that 80 to 90 percent of U.S. businesses are family owned, yet less than a third of family businesses succeed into the second generation and only 10 percent survive into the third.

There are few events in the life of a business that are as critical as replacing an owner. Replacing an owner is not only stressful on the successor owner, but also the employees, customers, suppliers, and other stakeholders in the business. Without a firm succession plan in place, you run a high risk that the business will fail because it is lost to estate taxes, there isn't enough liquidity to support it during the owner transition, there is no formal arrangement to transfer business ownership or appoint a new manager, the family can't agree on succession, or those who stand to inherit the business are ill-equipped to own or manage it.

As advisors, there are several important aspects involved in succession planning that we should bring to the attention of our clients. General aspects regarding succession planning vehicles and the events that should trigger succession plans are at the top of the list. However, additional aspects such as who the successor owner should be and when the transfer of ownership should take place are also topics to discuss.

Succession Planning Vehicles

1. Buy-Sell Agreement. For family businesses with multiple owners, buy-sell agreements are perhaps the most effective form of protection for surviving family members. A buy-sell agreement provides certain events, such as death or disability, that will trigger a requirement that the remaining business owners purchase the interest of the departing owner. In conjunction with structuring and executing a buy-sell agreement, it is necessary to plan for payment of the departing owner's interest. The most popular plan for payment involves the purchase of life insurance.
2. Manager-Managed vs. Owner-Managed Businesses. Ideally, the process of business succession takes place gradually during the lifetime of the first generation owner(s). Most business owners do not appreciate the fact that they can begin transferring ownership interests in their business while maintaining absolute control of the business itself. Manager-managed businesses are those that are managed by an independent manager who does not necessarily have an ownership interest in the business. Owner-managed businesses are those that are managed by the owner(s). A manager-managed structure allows for the resignation or replacement of the manager without effecting the ownership of the business, therefore reducing the potential for the financial instability and failure that losing the owner and manager in one fell swoop can create. Your client could retain his or her position as the manager while transferring their ownership interest to their children directly or in a Trust for their benefit.

Succession Planning Concerns

1. Successor Owners and Managers. For many business owners and managers, one of the most difficult questions they must ask themselves is "who should succeed me?" It's natural for business owners to look to their family members as potential successors, but as CPAs and attorneys, it is our job to ask the hard questions of whether or not their family members are truly the best choices. Additionally, while it may seem like a basic and obvious premise, it is important to once more point out that the owner and the manager can be two different people. Most family businesses start out with a single person, the founder, commanding the ship. That founder owns, manages, and often works as the sole employee until the business expands and new actors can be brought in. Many times when a first generation business owner begins to consider who it will be that inherits their business, they forget that the role of owner and manager can be split. While the business owner may want their family members to benefit from the success of the business as owners, family members may not be great choices as managers.
2. Estate and Gift Taxes. Hello taxes! While the impacts of estate and gift taxes varies from state to state, it is, as we all know, very important to consider the tax implications of transferring business ownership to family members. As discussed above, if done correctly, a family business owner can begin slowly transferring their interest in the business to family members during their lifetime without losing control of the business. This is one example of a way to decrease the potential impact of estate taxes on surviving family members.

Conclusion

Business succession planning is just as important and often more important than individual estate planning. Just like a person's estate, plans need to be developed for the family business in order to ensure the business will live on after the founder's passing, incapacity, or disability. A family business can serve as an income-generating asset for the lifetime of several generations if proper planning is in place.

Works Cited

• Business Succession Planning Checklist. (2013). Retrieved from Wealth Counsel: http://www.wealthcounsel.com/solutions/software-and-technology/wealthdocx/business-succession-checklist/
• Stalk, G., & Foley, H. (2012). Avoid the Traps That Can Destroy Family Businesses. Harvard Business Review.
• Team, N. M. (2013, July 30). Next In Line: The Advantage Of Business Succession Planning. Retrieved from Forbes: http://www.forbes.com/sites/northwesternmutual/2013/07/30/next-in-line-the-advantage-of-business-succession-planning/