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Succession Planning: A Will For Your Family Business
By ensuring an orderly transfer of ownership and management responsibility, a well-developed succession plan provides essentially the same benefit for a family business that a will does for family assets. Yet, according to the Michigan Association of CPAs, thousands of small business owners who wouldn’t think of being without a will have given little or no thought to who will guide their business someday.If seeing your business continue in the future is important to you, focus on succession planning. Succession planning guides the owner and family through each aspect of perpetuating a business after the owner has retired or passed away. Some reluctance to address succession is natural, but a well-defined plan could spare you and your successors or heirs a great deal of time, money, and legal problems.
Defending Goals And Objectives
It is important that you develop a vision for the business. Unless you have a vision, you won’t know what kind of leaders to identify and develop. Plan meetings with family members to discuss their goals, wishes, and concerns. Work together to determine what will happen when you exit the business. Basically, you have four choices:
- You can keep both ownership and management control in the family
- You can retain family ownership but hire management from outside the family
- You can sell the business to an employee, competitor, or other outsider
- You can simply close the company’s doors
Perhaps the single most difficult aspect of succession planning is identifying who will run the business when the current generation retires or passes on. Should the business be run by the eldest son who joined the business right out of high school or by the daughter who has an advanced business degree and experience working for other companies? What about the operations manager who isn’t related but has demonstrated his or her ability to run a business? You will be able to address these and other questions with your CPA.
Grooming Successors
Grooming the upcoming generation is a key succession factor. There’s nothing worse for your business than an ill-prepared leader. Many of the formal systems, such as written policies, procedures, and job descriptions, found in other larger companies, may exist only in the owner’s head. The goal is to transfer that knowledge to successors.
Sometimes the best advice you can give your children is to get experience working outside family business. This will give them a chance to make mistakes, grow, and develop on their own, and, perhaps, gain new perspectives that can enhance the family business.
Implementing The Plan
Once a succession plan is in place, the owner should communicate that plan to all interested parties. Such communication gives family successors and/or key management a clear understanding of the path to the future, and allows them to begin setting goals and objectives for themselves.
Although the actual transfer of control to the new successor occurs when the business owner retires, the transition can be gradual by turning over more and more of the day-to-day responsibility to the successor. For example, you should begin introducing successors to your key customers, suppliers, bankers, attorneys, accountants, and other professional associates well in advance of your departure.
Consulting With Your CPA
It’s not usual to see the bulk of the owner’s assets tied up in a family business. This can result in a large estate tax bill, sometimes so large that the family may be forced to sell the business to pay the taxes.
To prevent this outcome and allow more businesses to be passed down to the next generation intact, an additional tax exemption is available. “Qualified family-owned businesses” can receive an exemption over and above the amounts that may pass through the estate to a non-spouse free of federal estate tax.
In certain cases, small businesses may qualify for a special, long-term estate tax installment payment plan if they meet stringent requirements about who owns and works in the business. Be sure to consult with a CPA to take maximum advantage of these exemptions and payment options.
Keeping It In The Family
Succession planning may not come easily but, then again, neither did the challenge of growing your business. With ample time, open communication, and professional help, you can preserve your family business for years to come.
You seek the expertise of CPAs at tax and audit time, of course. But CPAs also promote personal and professional financial security year round. Visit the CPA Referral Service on the MACPA Web site to search for a CPA in your geographical area or specific area of expertise.
This article was submitted by the Michigan Association of CPAs.