Succession Planning: Don’t Put it off to Tomorrow When it Can be Done Today

Like Ben Franklin said “Nothing can be said to be certain, except death and taxes,” meaning don’t wait until it is too late.

Several recent client matters concerning succession planning remind us of the importance of emphasizing succession planning, including addressing specific issues surrounding the retirement of a company founder. Like Ben Franklin said “Nothing can be said to be certain, except death and taxes,” meaning don’t wait until it is too late.

Whether a manufacturer, a service business, or a distribution operation, laying the groundwork to secure your business for the next generation is crucial to achieve optimal estate planning goals, and to avoid business disruption (especially for closely held and family businesses) in the event that a key operator, or patriarch/matriarch of a family business, predecease his/her leadership roles in the business.

While this type of succession planning is less critical for publicly held companies, family-owned, closely held, or closely structured businesses must consider how to maximize the value of their business, pass the business on to its next generation of leaders, and otherwise maximize tax benefits while minimizing post-mortem governance issues.

Day-to-day management of these types of businesses is always a challenge, with its share of surprises and uncertainties. Of all possible issues, one is inevitable: succession. Whether it happens because the majority owner retires, dies, or becomes disabled, a time of transition will arrive. Often times, we see the impact of the lack of succession planning after the passing of a key operations person.

One’s best defense is a good offensive plan: to be strategically proactive, with an eye to maximizing value—even when the only option might be selling the business. Planning to ensure harmony and protect value in a time of transition brings substantial benefits:

  • Ensure continued success and maximize the value of the business.
  • Control the process, so it does not control you—it doesn’t have to play out haphazardly.
  • Confirm that governance will pass smoothly, without disruption, preventing situations where family or other owners can become adversarial.
  • Guarantee that the “next generation” knows the business, inside and out. The key owners’ technical knowledge, business and customer relationships and industry experience are often the company’s most valuable assets; establishing a well-communicated succession plan can help maintain key relationships.
  • An “Owners’ Agreement”—one that addresses control of the business—can proactively address successorship issues, including buyout rights and equity control, can prevent family or owner disharmony and preclude litigation, which too is often a short, reactive step for those in peril when a succession plan is not in place.
  • Structure the succession plan to maximize available tax benefits, and, if necessary, to create and maintain cash flow for the owners and spouses.
  • If appropriate, consider the “tools” of planning: shareholders’ or owners’ agreements, buy/sell agreements, keyman life insurance, voting versus non-voting or other equity arrangements, trust arrangements, gifting, equity options, estate planning mechanisms to pass down wealth, employment agreements and similar mechanisms—all of which should be integrated into the owners’ overall estate plans.

There is no one right answer to succession planning; most likely, a combination of legal and business disciplines is key to get the job done right. Consider estate planning, tax, business governance, and specific planning around elements unique to the business.

The sweat equity invested in business by its owners and key employees demands that owners and their families start planning early and make adjustments as necessary to a succession plan to preserve, grow, and maximize the value of their business, even if the ultimate plan is to sell the company to a third party. Early assessment of such planning provides owners, their families, and key employees sufficient time to address all financial and business issues, implement fundamental if not more elaborate estate planning ready the company for sale, and, most importantly, avoid discord arising from uninformed expectations of key players. In the final analysis, the objective is preventing the conflicts that generate serious disputes and litigation, thereby protecting the decades of hard work invested by all parties involved.

For distributors and others with questions, comments, or to further explore succession planning, contact Fred Mendelsohn at [email protected] or at 312-840-7004.

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