Business Succession Planning: Is Your Legacy At Risk?
The question of who will take over the reins, when the entrepreneurs and business owners of the 1970's and 80's reach retirement age, will be a major concern at every level of American business as we move into the 21st century. So says a survey of CPAs, conducted by the American Institute of Certified Public Accountants (AICPA).
More than 58% of respondents to the survey, which was sent to 4200 CPA/consultants in every area of the country, ranked inadequate succession planning as the biggest threat facing small to mid-sized businesses.*
Indeed, inadequate or inappropriate planning of all sorts is plaguing closely-held businesses. Nearly half of all survey respondents say it will pose a "severe or serious threat" to companies with fewer than $5 million in sales, often family owned and managed. Another challenge for family businesses will be lack of managerial skills in key positions, say the consultants.
According to the survey, family businesses are often caught up in day-to-day operations and are not well prepared to deal with a range of pressing management issues. Particularly cited were problems making use of valuable new technologies, evaluating cash management strategies, and a lack of awareness of cost-saving health care options and alternatives.
Many respondents observed that smaller companies tend not to maintain asset protection systems or understand alternatives to litigation.
For businesses that are largely family owned, key business owners must give attention to their personal estate plans and coordinating business succession strategies. Will the owner be able to retire when the time is right? If the owner suffers a disability, have steps been taken to insure that income continues for the owner, without a deterioration in the quality of business management? In the event of the death of an owner, are buy/sell mechanisms in place, so that the business and the family will experience minimal disruption?
In our law practice, it is not uncommon to find that a successful family business has developed over a period of years, often without written agreements between formal or informal partners, especially family members.
In most cases, "junior" or "junior miss" were youngsters when the parents began their business, and the integration of the younger generation into the business has occurred without real structure, often to the great relief and delight of the parents. For some, even the thought of discussing succession issues with family members is highly unsettling.
Unfortunately, these sets of assumptions often differ between generations and individuals, and, as any seasoned estate planning lawyer will tell you, when the time comes to pass the reins of management and ownership, "assumptions" are the basis of many a heartbreaking family feud.
Avoiding a family split may only be a matter of taking a few simple steps.
In a meeting with a trusted attorney, take your personal (family) estate plan documents with you. If your estate plan reflects your attitudes and wishes, it will provide the attorney with foundational guidelines that will help in determining your best business succession strategy.
If you are unfamiliar with the details of your own family estate plan (a not-uncommon situation), ask the lawyer to explain your plan to you, in plain language. Maybe it needs to be changed to reflect changes in your life, or to correct features that are not consistent with your point of view.
Your lawyer may suggest taking a first step, which could be a re-evaluation of your choice of business form (corporate, partnership or family partnership, limited liability company, sole proprietorship, for example). Another recommendation may be to have the principals and owners of the business enter into buy/sell agreements, which can provide an unambiguous mechanism for transition of management and ownership. Such agreements can facilitate retirement, accommodate disability, and make the after-death transition a smooth one.
If appropriate, your lawyer might suggest more sophisticated planning techniques, such as irrevocable trusts, employee stock ownership plans, or a tax-advantaged charitable gift program, for example.
A few hours in consultation with an expert now can save you, and those closest to you, from any number of problems, including unnecessary tax liabilities, intra-family alienation, business management disruption, competitor takeover, court-ordered liquidation, and a sad end to the lifetime body of achievement and goodwill that you have labored to build.
* Survey by Management Consulting Services Division of AICPA, as reported in Business Life, May 1995
