Do you have a plan?

Many family-owned businesses owners wrestle with succession planning challenges. Some find the subject daunting and tend to avoid it altogether. How to preserve and protect the company’s value and values is at stake.

• Prospects for future leadership.
• Transition during change. 
• Business valuation & real estate issues.
• Frequency of reviews.
• Estate and Gift Tax considerations.
• Expectations of non-family stakeholders who were promised compensation or other perks in exchange for loyalty to current stockholders.
• Intra-family issues.
• Members of the planning process.

Too often, life insurance is not present or under-utilized in a transition plan. The death of a founding shareholder is unsettling. Children have lost a parent, a spouse has lost a partner, employees have lost a leader and a business has lost many things. Time stops and the dynamics of change begin to be felt. Throughout this change, stability is crucial. An infusion of liquidity from life insurance proceeds will ensure stability.

To minimize the impact of estate taxes, to create immediate liquidity and to guarantee immediate liquidity life insurance should be part of every succession plan in a family business.

Life insurance enhances estate planning strategies. Structured properly, the net cost is minimal. In these cases, the cost of life insurance is handled by moving assets around on the balance sheet or through a private or bank financing structure. These are classic uses of insurance that guarantee better transition results, especially when valuations are challenged or litigation occurs. Litigation acts as a freeze on the planning strategies that were designed. Regrettably, the value of life insurance is not always appreciated or supported by all members of the planning team. Successful wealth transfer is not all about X’s and O’s. It is imperative that advisors are able to understand the problems from the perspective of wealthy families and relate to the challenges facing the family and its business. It will be helpful for family businesses to work with professionals with a track record of experience working with family businesses.

• Create a plan. 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 to do so. 
• 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 Good Will Ambassador. Who knows this story better?
• Have regular strategic planning meetings during the creation of the plan.
• Create a Board of Directors who are objective including some 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. Create written incentive plans instead. Create a stakeholder instead of a shareholder. 
• Buy-sell agreements should be in place for all shareholders, including founders. When a shareholder experiences a serious and unexpected health change, review the succession plan.
• Be honest when analyzing the strengths and weaknesses of family members.
• Be prepared for the unexpected. Who has been appointed to run the company at the sudden loss of a key owner?
• Include the next generation of leaders as early as possible.
• Prenuptial agreements for family members working in the business should be mandatory. The threat of divorce can be damaging to a family business. Litigation is divisive and destructive. The agreements show strength and commitment to the business’ long term success and protect family members.

• 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.

Also published on Medium.