Business Succession Planning
Business Succession Planning is not simply deciding who runs a privately owned company – it’s about deciding a company’s future. One in which it continues to benefit family members, shareholders, and employees long after the founders have moved on.
Two-thirds of closely held companies do not have a succession plan. Too many of those companies have plans that name a successor(s) but do little more. It’s little surprise, then, that fewer than 30% of privately held companies in the U.S successfully pass from the founder/owner to the next generation.
A business succession plan allows a business to continue to be successful after an owner retires, is disabled, or dies. Or, it may facilitate an orderly sale of the business that maximizes its value.
What happens when a successful business doesn’t have a succession plan? There’s drama, anger, hurt feelings, bitterness, Machiavellian machinations, and, perhaps, some dark humor. In other words, an episode of HBO’s Succession. Succession is a hit with viewers and critics and a fairly accurate portrait of what happens when a successful business has no plan.
Great entertainment, but no business would ever willingly want to live through it in real life.
There is no reason any business or any family should.
Succession Planning Issues
There is a web of issues to consider when designing a succession plan for a closely held company. Questions need to be asked and answered. Conversations – with key employees and family members – need to happen.
Some of those issues:
- How will the new ownership be structured? Who handles day-to-day operations? Who makes the decisions?
- When will it happen? At a set retirement age? Will it be triggered automatically with an unexpected death or disability?
- What’s the best way to preserve and protect business assets as the changes occur.
- Which family members will remain in the business? How – if at all – are other family members to be compensated?
- Who are the key employees? What’s the best way to keep them with the company during and after the change in ownership?
- Is there an advantage in changing the type of entity the company operates under?
- How to reduce the risk of business disputes.
These, and other issues, are addressed while, always, balancing the needs of the business and family.
Successful Succession Plans
A successful plan addresses the company’s present and future needs. It anticipates changing roles for management. It manages the expectations of family members and key employees. It protects the company and the family against the unexpected - death and disability.
A successful succession plan has contingencies for the contingencies.
Succession plans are never created in a vacuum. They must be integrated into the estate plan, tax, and asset protection plans.
It can be an emotional process for the business owners, family, and key employees. Succession plans affect family members and key employees in a number of ways - communication between all the parties is vital.
A solid succession plan usually includes:
- Buy-Sell Agreements that govern buy-outs due to death, disability, or retirement.
- A transition plan.
- Trusts to maintain control of the business.
- Compensation packages for key employees.
- Employee stock ownership plans (ESOP) that give employees an equity interest in the company.
- Income, gift, and estate tax saving strategies
- Tax planning that may include reforming as a different corporate entity.
- Minimizing liability exposure.
At Hopkins Centrich Law we aid family and closely held businesses in the Woodlands and throughout Texas with business succession planning. Our lawyers have decades of experience helping owners create plans that protect the integrity of their operations and maximize opportunities for success.