Life Cycle Financial Planners, LLC

When a family owned and operated business successfully transitions from one generation to the next, it is a work of art. At the risk of using one of the more overused euphemisms of the day, it truly takes a village. Each time I have the benefit of witnessing successful execution, I am struck by how many people worked hard for a sustained period of time, sacrificing for the good of the business and for family.  

One of the most complex challenges facing a large sector of the American business landscape is succession planning for family businesses. Speaking from personal experience, these are emotionally charged issues, often blurring the lines between business and family. Results take time to achieve and there should be a ready contingency plan in place if time runs out before the succession plan is finalized.

There are approximately 13 million family owned or family-controlled businesses in the U.S. These owners are going to shape an important part of the future economy. Second and third generation entrepreneurs face a more complicated world than their parents did, when they founded and built their businesses. Technology, work forces, competition and a global marketplace are changing at remarkable speed, challenging the best leadership. Often, the founders are still involved, making the job of running a family business difficult for the successor(s) in the best of situations.

Less than half of family businesses make it to the 3rd generation. Many entrepreneurs of family-owned businesses say one of their most difficult challenges is deciding who will succeed them as owners. How to preserve and protect the company’s value while providing for a transition of ownership and management that complements the style and visions of each generation can be a frightening proposition.

Succession planning should be done with a team of professionals from the law, tax, insurance and when necessary, the industrial psychology field. Estate and succession planning decisions involve questions of law, tax and business planning that will focus on the types of property to own, stock ownership, and the organization and operation of the business as well as steps for passing that business to the next generation. I have often found that Trust companies such as The Northern Trust have professionals with great experience in the family planning process.

The Plan – A Fluid, Lifelong Process

Succession Planning is a process, not an event. Once the formal Succession Plan is in place, it should be an evolving plan that is reviewed and updated to reflect changes in the business, the market, competitive conditions and the health and capabilities of the current leadership. The review process is a great opportunity for ownership to deal with a variety of issues such as:

Family business owners are focused on day-to-day challenges. Sometimes, other deeply personal and often dysfunctional problems come into play, preventing the eventual transfer of a very significant asset, affecting many lives. In doing so, they not only jeopardize the future of the business but also the financial security of their families. 

Effective succession and estate planning establishes who will run the business after the owner or co-founder retires or dies and how ownership will be transferred. The estate plan should include details about how the owner will pass on the business interest to surviving family members. The plan should also seek to minimize estate and gift taxes. At the same time, it should provide sufficient liquidity to pay these taxes. Life insurance and annuities are often used to cover the funding of these obligations. Done correctly, the planning takes advantage of wealth transfer strategies, gifts, trusts, and family partnerships, which can all be used during the owner’s lifetime to transfer wealth to the family.

The role of life insurance.

Life insurance is often under-utilized at great cost to successful transition planning. As a vehicle used to minimize the impact of estate taxes and create cash for the business when it is needed most, life insurance should be part of every business succession plan. It will not replace the planning done by the other professionals doing everything reasonable to create a workable plan to minimize tax while allowing the family to retain control and flexibility. I have seen many plans with elaborate strategies that leave survivors and the next generation with clumsy vehicles, newly formed asset protection companies and not enough cash. When these complex and expensive strategies to reduce taxes and protect assets are implemented, life insurance should always be in place to support guaranteed outcomes. This is a classic use of insurance that will guarantee transition results in the event valuations are challenged, litigation occurs or if the cash position of the business is poor at the time of transfer.

When the main priority is the successful transition of the business to next generation family members, life insurance will guarantee the result. Death creates uncertainty and fear. Life insurance proceeds help manage through this period by ensuring that the planning will become a reality. Without life insurance in place to protect against the loss of the key person and guarantee the cash required to execute the stock transference plan, too many things can go wrong. Regrettably, life insurance is not always supported by all members of the planning team and its absence in the plan is often catastrophic.

Once a Succession Plan is firmly in place, the business owner(s) must be prepared to execute the transition without reluctance or regret. By doing so, a message will be sent to the next generation, the employees, the company’s partners, vendors and the customers that this is a proactive plan made with full support of all stakeholders. The outgoing founder(s) may or may not want a continuing role in the management of the business. For some, it is better to make a clean break. A successful transition plan sets a fixed transition date with a strong and independent team of advisors in place to support the new generation of leadership.

Tips for effective Succession Planning:

The Benefits of Communicating the Plan.

Many family-business owners acknowledge the problems that can emerge without a succession plan but find it difficult to create and implement one. The confusion and ambiguity of not knowing how or when the next generation will take over can be avoided. Apathy or silence won’t prevent family members, key employees, customers or even competitors from reaching their own conclusions about the future of the company.

To get started, you will need:

The value of a business succession plan goes far beyond transition. The process will identify strengths and weaknesses that might otherwise be neglected. There is never a perfect time to begin the process which makes now as good a time as any. Please contact Ted Bernstein in Boca Raton, Florida. Ted can be reached directly at 561-869-4500.