Succession planning prepares the business, its owner, and the owner’s family for the day when the owner no longer participates in the operation. Without planning, that day can create crisis and conflict in both the business and the family, which clearly has adverse consequences both emotionally and financially.
A business owner with more than one child often faces difficult decisions when planning for the business succession. Clearly, the owner’s emotions for his children and desire to treat all of them fairly can color the choices that must be made. Also, in many ways, the business is the owner’s legacy.
The goal of most business succession plans is to provide for an orderly transition of management and ownership when the owner retires. Unfortunately, this goal may be defeated if the owner dies before retirement.
The funding aspect of the succession plan involves quantifying the owner’s needs, identifying alternate sources of funds, and determining which are economically feasible, both to the seller and buyer. Both tax and nontax considerations affect the analysis.
Unless they have capable successors and employees, many closely held businesses do not survive the departure of the owner. The chance of survival is further diminished if key employees leave instead of adapting to the new owners and management. Therefore, a business succession plan should contain strategies to identify and retain key employees.
Buy-sell agreements are important tools for preventing unwanted persons from becoming members of the ownership group, ensuring continuity of ownership, and providing a ready market for closely held business interests when an owner dies or withdraws from the business.
An owner has several options for transferring ownership in a partnership or LLC. Many owners depend on business cash flow to meet their living expenses. These owners generally must choose a transfer option that generates enough liquidity (either when the transfer occurs or afterwards) to meet their income needs.
Family businesses are unique in that the goals and relationships of the family overlap with those of the business. Unfortunately, this overlap is often the source of tension and conflict and can create obstacles that inhibit the succession planning process.
The issue of a business valuation will naturally come up during the course of most business succession planning engagements. The value of the business is important to the successor as well as the owner. If the business is being sold to an unrelated party, the valuation will help determine the purchase price.