Build a solid strategy for biz succession

Scott Albright

Scott Albright

Operating a family business comes with unique challenges. As a business owner, contemplating retirement and letting go of the reins to the next generation is just one of them. Many of my clients over the years have shared with me their hopes to ensure a successful transition to their designated family members. As someone who has seen shaky succession plans fall apart, the planning process can’t come soon enough.

Statistically, roughly only 30 percent of family-owned businesses are effectively transferred to the second generation; 12 percent make it to the third generation; and only 3 percent operate into the fourth generation and beyond. There are myriad reasons for this, but one recurring issue is a lack of effective succession planning.

How should business owners get started?

You need to consider the “three Ts” of successful transition. They are:

Transferring management

Transferring ownership

Tax consequences

In all cases, having a plan that is strategic and well executed is key, but that takes time. The most successful transition plans take place over a number of years as successors develop the skill sets required to run the business.

How is management transferred?

It’s important to select an independent adviser who is highly experienced with planning issues to arrive at the best plan for you and the next generation. A financial advisor can assist with retirement plan projections and planning. Generally, a Certified Public Accountant or a certified valuation analyst can give a good idea of what a business is worth. A good CPA can also help clean up financial statements and help you understand the tax implication involved in transitioning the business.

A financial advisor can also provide education and guidance on how to engage with your CPA, legal team, senior advisors and business partners and help carefully map out the exit strategy, in addition to providing advice on the types of agreements and contracts needed to have in place. These could include continuity plans, buy/sell contracts, partnership agreements and operating agreements. It is generally a good idea to start this process two to three years before planning to sell. Financial advisors such as Nevada State Investment Services and LPL Financial, do not offer CPA or legal services so it is important to hire the appropriate professionals to provide these services.

Some areas to consider are: If more than one child is involved in the business, how will contentious decisions be made once you exit the business? If you want certain key, loyal employees to be cared for, as they are likely necessary for a smooth transition, what assurances do you have this will happen? What happens if unexpected health issues force the transition early? A well-developed plan ensures the business will thrive without interruptions, helps the next generation grow into their role at a reasonable pace and promotes future harmony among family members.

The short-term plan component ensures there’s enough liquidity and insurance to hire necessary experts and avoid a fire sale. The mid-term component must prepare developing successors or key employees to be in decision-making roles initially. It also would have a timeline for family members to step into their new roles with certain targets. The long-term component is ultimately what you want to happen — the best of all circumstances. After discussing your plan with advisers and successors, involve your key employees who may be more satisfied knowing the company’s future.

What are some factors to consider with transferring ownership?

Once the management transition plan is established, plans for transferring ownership can occur. Usually this begins with your retirement plans. How much income will be needed and what’s the timeline? If you need cash from the business, are you willing to bear the investment risk of the business as a source of income once you’re not involved? Then, consider estate-planning issues. Are all your children involved in the business? If not, do you desire to ensure each child will ultimately receive an equal estate share?

How do tax consequences factor in?

Taxes are the tertiary consideration once decisions have been made regarding the general retirement and estate plans. As is the case with investment portfolios, taxes should never drive the decision-making process. Tax-reduction strategies should only be considered after other issues are decided.

Business owners in general, and particularly family-business owners, should begin now and get an experienced, independent adviser to guide them through the process. The earlier you plan, the better the results. Sound, experienced advice will make the process that much easier and maybe even bring family members closer.

Scott Albright is a financial services professional and serves as vice president/wealth advisor for Nevada State Investment Services. He is based in Reno. The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.


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