The word “succession” literally means the “passing on” or “transition” of success. Succession planning is a critically important “rite of passage” for a business from one generation of ownership and management to another, most often drawing on the resources of family members who are willing and able to carry on the business. While it is an important adjunct in the business owner’s overall estate plan, it doesn’t have to be complicated and should occur before probate.
1. Determine who is involved
2. Develop a strong business plan with new accountabilities
3. Determine when the plan needs to go into effect
4. Determine how the plan is to be executed
Depending on the family dynamics, each family member involved in the transition of wealth understands the difference between fair and equal. Additionally, all of the following provide fodder for the potential arguments that could arise over what the best succession plan is to achieve a transition for the business, for the employees and for the family:
- Relationships between siblings
- The role of in-laws in the business
- The ownership split
- The influence of owners and spouses
- The respect that the various family members have garnered among the employees and key customers
In some cases, the customers have a stake in the outcome as well.
Determine Who is Involved
There is the potential for strong dynamic tension in each part of the succession plan as it is developed and executed. Even simple “father to son/daughter” transitions can be complicated if there are other siblings, important key employees or critical customers. The size of the overall estate can add complications as well. Every aspect of the business is called into question as to its relevance and importance to the viability of the business after the owner, with whom all employees have in one way or another achieved a level of comfort and trust, steps out of the picture and new leadership emerges.
It is critical to the current ownership that the business first “survives” and secondly “thrives.” Succession planning is not a one-sided activity for family members who become involved in the succession process discussions and the ones who end up with the business equity. The son or daughter who is about to carry on the business must be sure that this is what he/she really wants to do. He/she should clearly understand the obligations, not only to family and employees, but also to his/her own family, in terms of committed time and the risk to personal wealth. In most cases, it is a privilege to inherit the business, but in some cases, the burden can be very heavy and troublesome.
There can only be one CEO. When there are two or more siblings or in laws involved, it is necessary to choose one of them as the head of the company. Protections and agreements can be put in place regarding major decision-making, profit distributions and roles and responsibilities, but there can be only one person in control who holds the accountability for the business. Ownership’s desires and rules for the business will only survive up until the transition and control transfer. It would make sense to choose the most capable person to succeed, but that is not always possible given the family character and sibling rivalries. Many retiring owners believe that keeping peace in the family is just as important as the money. The transitions that cannot occur smoothly due to family discord will often result in either the business being sold or outside leadership and management being brought in.
When the first step has been accomplished and there has been a deliberate declaration of succession between the chosen parties, a judgment must be made about how much of the estate is to be collateralized behind the business, how much needs to be built into the balance sheet, how much debt can be afforded if
