Raise the odds of business survival by developing a succession plan

Many business owners have spent their lives building their businesses, but too few devote the time necessary to ensure that it survives after they’re no longer at the helm. Two-thirds of US family businesses fail to survive into the second generation and less than 15% into the third. The Wisconsin Institute of CPAs says business owners can beat these odds by developing and adhering to a comprehensive business succession plan.
Developing a succession plan is a process that should begin long before an owner is ready to leave. It should also be in place to ensure smooth operations in the event the business owner suddenly becomes unable to oversee them. Exactly how and when an owner transfers or sells a business is affected by the owner’s personal financial situation and the needs and roles of family members.
Assess your
financial situation
The first step for a business owner in preparing a succession plan is assessing his or her own financial situation. For example, how much income do you currently derive from the business and how much do you anticipate needing for living and other expenses once you are no longer an owner? Answering these questions can help to determine the best transfer method.
Consider your family
The needs and roles of family members also impact the transfer of the business. For example, when there are no children in the business, an owner may look to sell the company to a strategic or financial buyer, to management in a leveraged buyout or through an employee stock ownership plan.
On the other hand, when children are in the business, you will need to consider the tax implications of transferring the business to them, as well as address other questions, such as: How do you treat children equitably if they do not participate in the business? Will there be any family friction after the transfer? And should children not in the business have an ownership interest?
Determine a successor
The first challenge most family business owners face when thinking about their company’s future is deciding who should run it. The person who runs the company need not be the new owner. If you want to pass your business on to your heirs, you needn’t feel compelled to name a child as CEO. In fact, since the CEO will be the person most responsible for ensuring the future viability and profitability of your company, the best interests of the entire family are served by choosing the most capable person for the job. In fact, some companies employ industrial psychologists to establish the right character profile one needs to run the company.
The person you select to manage your company should be groomed for the position before he or she actually takes over. If succession has not already been determined by interest, proximity, or birth order, a group effort in choosing and grooming an individual to succeed is one way to proceed. By allowing long-time key employees to participate in the selection or initiation of a successor, the entire team will benefit over the long term.
Just remember, while ownership may be divided among family members and others, management should be clearly delineated.
Take control of taxes
Estate taxes can hit a family business hard because the full fair market value of a parent’s company may be included in the estate when he or she dies. (In certain situations you can elect to deduct up to $675,000 of qualified family-owned business interest from the gross estate.) If an owner dies without a plan in place, heirs may face estate taxes on the business ranging from 37 to 55%. Keep in mind that while the new tax law has increased estate tax exemptions from $1 million to $3.5 million through 2009, proper tax planning is what will enable you to take advantage of the higher exemptions.
To begin to divest yourself of the company, you may make a gift of ownership interest worth up to $10,000 a year (or $20,000 split between husband and wife). Another option to consider is a family limited partnership that allows the business to be transferred to the younger generation at substantially less than its fair market value, thus reducing the size of the estate and the federal tax bite.
CPAs say early planning can help business owners minimize tax burdens on heirs as well as prevent family and other disputes over ownership. Once a succession plan is developed, it’s wise to revisit it should financial and personal situations change.
December 7, 2001 Small Business Times, Milwaukee