It may seem like you have endless time to create a succession plan for your family business, but you never know when you’ll want or need to exit your business. How can you prepare? By creating a formal succession plan. If you’re thinking about it or have already started the process, you’re ahead of most other business owners.

Succession planning is just one aspect of the broader wealth management services we provide at Meaden & Moore. Our advisors have guided hundreds of family businesses through succession planning and tend to get asked similar questions throughout the process. Here are answers to the common questions we get which will hopefully help you on your journey to building a long-term, strategic succession plan.

Q: Who should start the succession planning process?

A: Succession planning must begin with the senior generation of owners and operators who currently control the business. Whether a single individual or a group of owners, the senior generation must start by addressing the issues that will be important in defining the ultimate goals related to:

• Ownership succession
• Management succession
• Financial security
• Tax efficiency
• Family harmony
  

Q: What questions do you need to consider during the succession planning process?

A: Creating a succession plan for your family business takes strategy, thought, and time and isn’t something that should be rushed. You’ll be asked to consider many important questions throughout the process, but here are some of the common ones you’ll want to have answers for.

• Who should be included in the next generation of owners?
• Should the next generation of owners be limited to family members?
• Should key employees be considered for share ownership?
• Is employment in the business a condition for family share ownership?
• If employment is necessary, at what level? Executive? Management? Rank-and-file?
• Must all family employees be treated equally?
• Is there a means to treat family members fairly without granting share ownership?
• Must ownership be relinquished if a family member ceases to be employed?
  Is ownership a birthright? Is kinship the sole prerequisite for share ownership?
• If ownership is a birthright, how does one distinguish between different levels of contribution to the business?
• When considering income, earnings, and the complexity of the business, are ownership and management necessarily co-dependent?
• Should a Shareholder’s Agreement be implemented to restrict the subsequent transfer of shares?
• How should contingencies such as death, disability, divorce, retirement, resignation, or termination be addressed?
• What economic benefits should minority shareholders receive?
• What challenges could be posed by minority shareholders?
• Should an independent board of directors or advisors or family council be considered?
• Should you be using share ownership and the business to address family dynamics?
  
• Should professional counselors be employed to navigate these complex questions?
  

Q: How do you determine who will run a family business in the future?

A: One of the greatest challenges in family business succession planning is determining who will eventually run the business. The best interests of the company should be the foundation for answering this question. First, understand the skillset that will need to be replaced. Consider:

• Is the departing owner responsible for the strategic direction of the business?
• Does he or she serve important roles in financial and administrative management, operations, or sales and marketing?
• Are there special relationships with customers, clients, vendors, suppliers, government or regulatory officials, community leaders, or a board of directors or advisors that must be transitioned?
  

Second, objectively assess the skills and weaknesses of potential replacements. Try to remove the fact that some potential replacements are family members and take an honest look at their abilities. Third, do what’s best for your business. It may be necessary to look beyond family members and employees to find the next generation of management.

Q: What should a business succession planning process include?

A: At a minimum, you’ll want to include the following in a succession plan:

• Engagement with appropriate professional advisors
• Identifying and understanding the issues you’re facing
• Identifying and understanding the issues facing other key stakeholders
• Identifying the overarching business goals and needs
• Thoroughly exploring and understanding your options
• Developing a plan
• Implementing a plan
• Monitoring the plan and enjoying the results
  

Q: How should you address cash flow and financial planning in a succession plan?

A: To address cash flow and financial planning, start with the expense side of the income statement to drive the process. Focus on what it costs to maintain the lifestyle to which you have become accustomed and project those costs, with a factor for inflation, into the future. It’s important to distinguish needs from wants so that in case the likely circumstances will not generate sufficient cash flow, appropriate actions can be taken.

Next, focus on the income side of the statement by identifying existing or anticipated sources of cash flow, such as social security, pensions, annuities, etc. Include the propensity for the existing balance sheet assets to provide cash. If there is adequate cash flow from existing sources of income and assets, you will likely breathe a huge sigh of relief. But in the more likely scenario, there will be a deficit. If this is the case, you’ll need to isolate and manage the financial variables that can be controlled, such as reducing spending, balancing risk and reward to generate higher portfolio returns, and defining the financial requirements that must be met as a result of the business transition.

Q: What tax implications do you need to consider when succession planning?

A: First, it is important to understand that any accession to, or disposition of, wealth carries a potential tax consequence. Because of this, it is imperative to engage the assistance of an experienced tax professional to avoid the possibility of unintended tax consequences derailing your transition or generating unanticipated costs. You’ll want to consider these questions:

• Will the transition involve a sale or an exchange of consideration between the parties?
• What is the capital gains rate?
• Is any part of the gain short-term?
• Are payments made tax deductible or not?
• What if the transaction between the parties does not occur at fair market value?
  

The answers to these questions, among others, will help determine how to structure the business transition to minimize tax consequences. 

Q: Do you need to have a buy-sell agreement as part of a succession plan?

A: Yes, a buy-sell agreement is an integral part of a comprehensive business succession plan, but it does not stand as a succession plan on its own.

Q: How often should you update your buy-sell agreement?

A: Your buy-sell agreement should be reviewed and updated, if need be, annually. You want to ensure your buy-sell agreement is relevant under current business circumstances and reviewing it can be a catalyst for adopting a formal succession plan.

Q: How do you conduct an annual review of a buy-sell agreement?

A: To complete a review of your buy-sell agreement, you’ll want to review:

• The parties to the agreement
• The terms of the agreement
• What events would trigger a transfer among shareholders
• The transfer price and payment terms
  

Q: What stakeholders should you consider in a family business succession plan?

A: Some stakeholders are obvious and include those family members who are active in the operations of the business and key employees. Others, however, may not be as evident. These stakeholders include the spouse and children of the owner, employees, vendors, suppliers, and customers that provide or consume goods and services and that benefit directly from the success of the business, and the community at large.

Q: What should a written business succession plan include?

A: A written business succession plan should address ownership and management succession and may exist alongside a written business mission statement (a short statement that defines the essence of the business) and a written strategic plan (a more thorough statement of purpose and philosophy highlighting both short-term and long-term goals and the plans to meet those goals).

Q: What is one of the biggest obstacles in the succession planning process?

A: The inability of the senior generation business owner to communicate his/her goals and objectives for the family and the business.

Creating a succession plan is all about collaboration and communication between a business’s current owner and its future leaders. Having these conversations will help you develop an attainable plan, increasing the probability of a successful transition.

If you need help creating a family business succession plan, contact Meaden & Moore. Our team takes a comprehensive approach to creating your business succession plan that’s customized to your organization. In the process, we will engage the appropriate professional advisors, identify the goals of the business, owners, and stakeholders, and work together to develop, implement, and monitor your succession plan.