It's usually the hardest decision a business owner has to make: Who to hand over control of the company to when they retire and how to do it.
When a son or daughter has joined the company, the decision would appear simple. Yet, often, there are loyal employees who have been with the company longer than the heir apparent, who know the business better and who seem more committed to its future.
Kent State's Ohio Employee Ownership Center works with the owners of family-held businesses and each year holds a series of seminars at CAMP Inc. that grapple with such issues. At the kick-off seminar in October, James D. Vail and Charles F. Adler of Schneider, Smeltz, Ranney & LaFond stressed the importance of planning as soon as possible for departure from the company, even if you can't finish the plan.
"It's better to have an imperfect plan than nothing at all," Vail says. "You've all heard the war stories: 'Sure, Dad knew what was best, but he couldn't get around to giving up control. So he did nothing.' It's much worse to do doing nothing than to get at least half of the way there."
Unfortunately, few business owners relish the task of sitting down and figuring out what will happen to their company when they are gone or no longer the top decision-maker. If you fall into this category, keep these sobering facts in mind: Of all business succession failures, only about 10 percent are attributable to transfer tax. And in Australia, for example, which does not have a transfer tax, the same percentage of businesses fail between generations as they do in the United States.
Here are some factors to consider in your succession plan.
Soft issues are important
The most critical part of succession planning is not deciding the different classes of stock or deciding whether to do an Employee Stock Ownership Plan. The most important part is figuring out what's most important and setting priorities, Vail says.
"What about passing on this business is most important to me? Without that, you're letting the cart lead the horse."
If you are looking to design a succession plan and haven't started to pass down the assets of the company to whomever you plan to have run the business, you're setting yourself up for a big tax bill when you eventually retire. It's a good idea to start an annual exclusion gift of $10,000 or $20,000.
"Your assets are going to come down for now, but if you look at the family wealth, there's going to be a huge difference," Adler says. "Half of estate planning is timing."
If you have a valued employee whom you want to stay with the company, but you want to pass the business on to your children, consider phantom stock as an attractive financial bonus for your loyal manager or administrator.
It's not actual stock, but the employee receives a bonus depending on the growth of the company after the owner steps down. The payment can be spread out over several years or delivered all at once. The strategy is also called Stock Appreciation Rights.
Don't wait on Washington
Since Congress passed the estate tax repeal last year, there's a lot of speculation among estate and succession planners about what to tell their clients, Adler says.
"Right now, most advisers are not advising people to make taxable gifts because of the state of flux of the tax law. Even if they do repeal the tax, all the goodies are at the end. There's a 10-year phase-out."
Basically, if you're stepping down soon, plan as if the estate tax law will still be in effect.
Consider a sale
While it may seem the unthinkable, if your main concern is getting the most value for your company when you step down, you'll put it on the market and sell it to a strategic buyer, Vail says.
"You're probably going to maximize your return," Vail says. How to reach: Schneider, Smeltz, Ranney & LaFond, (216) 696-4200; Kent State University's Ohio Employee Ownership Center, (330) 672-3028
Morgan Lewis Jr. (firstname.lastname@example.org) is a reporter at SBN.