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.
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:
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.
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:
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.
A: At a minimum, you’ll want to include the following 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.
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:
The answers to these questions, among others, will help determine how to structure the business transition to minimize tax consequences.
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.
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.
A: To complete a review of your buy-sell agreement, you’ll want to review:
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.
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).
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.