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Succession Planning ~ Turning Your Business into A Family Success Story
Scott G. Beattie, J.D., LLM

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When it comes to estate planning for business owners, the best measure of success is whether you can maximize the benefits of your business for your entire family during your lifetime and beyond. Statisticians tell us that only 20-25% of family businesses are successfully transferred to the next generation. The failure rate is even higher with professional practices.

While lawyers and accountants have long been key players in development of business transfer strategies, lately the focus has shifted to the business owner's role in the process. A hot topic in this area is the development of a "succession plan."

What is a succession plan? Basically it's the evolution of your business plan (if you have one) to include elements of long term planning and, particularly, to focus on major life events. If your business plan takes into account transitions which occur at the retirement or death of an owner or key employee, or on the entry of an heir into the business, then you are already doing some succession planning.

How do you develop a succession plan? Planning begins at home. More than anyone else, the business owner will solve or fail to solve the succession dilemma. Often the best starting place is to look at your goals. If you need help getting started, here is a short list of questions designed to focus you on important issues.

• What are your long term goals for your business? Do family members have similar goals?
• What would you like to see happen to your business upon your retirement? Death?
• Do you want any family members to participate in the business?
• Do they want to participate?
• What education/training do family members need to make them fit to run the show? To play a part?
• Who is most suited to be in charge? Play supporting roles? Sit on the sidelines?
• Should family members who are not participating be given an ownership interest in the business?
• Are there key unrelated employees who are essential to the success of the business? What can you do now to ease their fears so they don't leave at a critical transition point?
• Do you have sufficient nonbusiness assets to equalize your estate distribution for non participating family members?

From the legal side, the implementation of a succession plan typically goes well beyond the creation of a Will or a Living Trust. It can include the choice of business entity (e.g., Corporation, Partnership or LLC), the design of the capital structure (e.g., voting rights and debt v. equity funding), and retention of key employees through executive compensation arrangements. Agreements which focus on the control and ownership structure such as buy-sell agreements, shareholder agreements, and option agreements can also be essential to implementation of the succession strategy.

Well designed succession plans often include income and estate and gift tax planning strategies such as gift trusts (designed to shift income among family members and maximize intra family transfers while keeping the control structure intact). Estate and gift tax strategies are important to minimize the impact of these taxes on the business and to deal with liquidity issues if an estate tax must be paid.

Succession planning can be critically important if you don't want to leave your business to fate. If family members participate, having a succession plan can help ensure that the business survives and prospers into the next generation. If family members do not intend to take over the business, then having a succession plan can help ensure that you and your family at least obtain the best value for the business.

The yardstick you use to measure your success will depend upon your goals. If your goal is to have your family continue the business and the business must be sold to pay estate taxes, then your succession plan has failed. If you want one child to take over, but the business must be sold to equalize the estate distribution for your other children, then your succession plan has failed. And if you simply want the business to be sold so your family can receive the most value possible, but the business fails from lack of management before a buyer can be found, then your succession plan has failed.

Business owners are used to taking charge and dealing with difficult issues. Succession planning should be no different.

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