Easing the Transition of Your Business – Life Cycle Planning

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:

  • Prospects for future leadership.
  • If succession of family is not clear or possible, what other exit strategies are available? If the succession plan fails, will it lead to failure of the business or litigation?
  • Transition. Are there any current physical or mental challenges?
  • Business valuation & real estate issues.
  • Estate and Gift Tax considerations.
  • Expectations of non-family employees who may have been promised ownership or compensation for loyalty to current stockholders.
  • Intra-family issues?
  • Who should be included in the planning process?

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:

  • 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.
  • 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 Ambassador of Good Will. Who knows this story better?
  • Have regular strategic planning meetings during the creation of the plan and forever after.
  • Create a Board of Directors who are objective and 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. Everything you want to do by giving stock in the business can be done in other ways, via compensation plans, to create a stakeholder instead of a shareholder. And, if for some reason that cannot be done as neatly in your business, err to the side of not giving stock to non-family members.
  • Iron clad buy-sell agreements should be in place for all shareholders, including founders. 
  • Be honest when analyzing the strengths and weaknesses of family members when considering successors and the final succession plan.
  • Be prepared for the unexpected. Most closely held family businesses without a succession plan experience a “sudden loss” of leadership due to death or disability, leaving behind children or spouses who are too young or too inexperienced to manage the business effectively. Is there a plan and who is aware of it? Who has been appointed to run the company?
  • Educate the next generation of leadership. This is a critical step that is often avoided for a variety of reasons.
  • Prenuptial agreements for family members working in the business should be mandatory. The threat of divorce can be very damaging to a family business. Litigation is divisive and destructive.

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:

  • 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.

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. 


Also published on Medium.

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About Ted Bernstein 43 Articles
Dedicated to helping people create the ultimate retirement security and protection plan to safeguard their families and businesses. I stress guaranteed income solutions, indexed annuities and state of the art wealth preservation strategies. As the innovator of life insurance products without commissions, my recommendations are impartial, objective and always in the best interests of my clients.