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Financial Management Strategies

Business Succession 101

Hopefully, your business will grow to the point where you, the owner, are called upon to undergo a radical transformation and change from being the "doer" to being the manager.

The transition is generally not difficult if it is eased by preparation, most of which will involve your family and/or business partners. It then becomes essential that everyone gets together to talk over the business issues that will affect their lives.

The discussion should determine:

  • Who will be active in the business;
  • What their roles in the business will be;
  • How participating individuals will be compensated; and
  • What compensation inactive members will receive.

And this gets tricky with family members because you must be able to entertain the views of family members and articulate your own views and interests.

Out of a series of discussions, a succession plan should emerge. This plan must take into account your age and health, as well as the expected rate of growth of the business. It must also consider the ages of everyone else, including your spouse and children, in addition to their abilities and interests. Because of the variables involved, any succession plan should be subject to modification as developments take place within the business and your family.

Who is Your Successor?

In any case, a succession plan should look at ways and means of designating your successor. An important factor in choosing a candidate will be on-the-job training and experience. Outside job experience and academic achievement and preparation are also important.

In the opening stages of the discussion regarding the succession plan, the question of compensation or other distributions will probably arise. As the owner, your views should take precedence. If you are disposed to treat your children equally, for example, the family conference should be the ultimate arbiter.

Succession planning may also include stock transfers. Stock transfers involve tax considerations, that is, income, estate, and gift taxes. Use of the annual exclusion and unified credit come into play as a means of reducing estate taxes. Stock held until death will receive a "stepped-up cost basis" and eliminate potential capital gains income taxes on the growth.

Family members should also discuss the structuring of a buy-sell, entity, or cross-purchase agreement funded by life insurance. If an unfunded plan is put into effect, the family owners who will ultimately be buying your interest in the business may not have the cash or the borrowing ability at your death. An appropriately drawn will is also part of the process.

Crucial to the ultimate outcome of a succession strategy is the development of a business plan that analyzes the immediate, intermediate, and long–term goals of the business. The plan should be based on financial forecasts and budgets that are adaptable to changing conditions and checked against actual results.

Consideration should also be given to the inclusion of non–family members on the board of directors who can bring new ideas to the business and help mediate any family disputes that may develop within or about the business.

Your Financial Professional

There is no doubt that starting a new business requires a lot of dedication and a fair amount of luck. And running an established business requires different skillsets relative to launching a startup. And of course, creating a succession plan introduces a whole new set of challenges, many of them relationship-based.

Layer on top of those changes your need to save more, manage your money better and ensure your financial plan is personalized to your risk tolerance, and it's easy to become overwhelmed.

But a financial professional can help you consider all your needs and provide guidance as you make decisions tailored to your business goals, no matter what stage your business is in.



Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Nothing contained herein shall constitute an offer to sell or solicitation of an offer to buy any security. Material in this publication is original or from published sources and is believed to be accurate. However, we do not guarantee the accuracy or timeliness of such information and assume no liability for any resulting damages. Readers are cautioned to consult their own tax, legal and investment professionals with regard to their specific situations.
This article was prepared by FMeX.
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