The fact is that most family-run businesses do not have a succession plan. Data shows that only 30 percent of family-owned businesses will make it to the next generation (and only 15 percent survive to the generation after that). While the estate tax is often to blame, the reality is that these businesses do not make it to the next generation because of poor planning by the owners, who don’t want to face the fact that eventually they will retire and/or die.
“Mortality is not something any of us want to face ... and it’s hard for owners to think of letting go of a business that they have probably worked on all their lives,” says Jamie Richardson, vice president and branch manager for View Point Bank of Plano. “But good succession planning must address at these issues squarely and make plans for the future.”
Smart Business spoke with Richardson about the importance of creating a family business succession plan and how business owners can take steps today toward creating a plan that lives out their wishes for the business once they are gone.
What are the critical steps to ensure a successful business succession plan?
First, determine the purchase price or fair market value of the business. This is done via an accountant or business valuation service. If you fail to establish an accurate value for your business, the IRS will establish one for you. Owners of closely held businesses often have a difficult time ascertaining what value the IRS might use for Federal Estate tax purposes. Proper business evaluation can eliminate future conflicts between shareholders and the IRS. If you dispute the IRS, years can be lost to a legal proceeding before a court ruling is established.
Second, have a written plan (typically set up by an attorney) indicating the participants, timing, triggering events (death of owner, retirement, disability) and price. This is one of the most important decisions a business owner must face: when and how to step out of the business. Do you expect to retire? Do you have children that you hope to bring into the business? What would happen to the business if you were to die today? Do you want to pass the business on, sell the business as a going concern, or liquidate the business and sell the assets? Once these questions have been answered, advisers can take a course of action.
Third, fund the plan. A business continuation plan isn’t worth the paper it’s written on unless a source of funding exists for the buy-out. There are several sources of funding: borrowing, sinking fund, installment payment, life insurance.
When is the best time to create a succession plan?
Start now, even if it might be a long time before you actually need to use it. This way, you have plenty of time to consult with professionals and put your plan in place, and you optimize your chances of getting the most financial and personal satisfaction from the results. Because this is a difficult process, many businesses avoid it. It can be time-consuming and costly to set up, and there is often discomfort in dealing with family issues as they impact the business.
What are the challenges to creating a succession plan?
The process takes time to work through the issues. It can be challenging coordinating the advisers on the case (attorney, CPA, financial adviser). Business owners are busy with the daily management and operations of their company and they postpone planning. The nonfinancial (emotional) side can be the most challenging in creating a succession plan.
What are the consequences of not developing a good succession plan?
Not having a succession plan in place could result in a fire sale of the business which translates to a loss of financial security to the surviving family or owners. In the worst-case scenario, the business could die and not survive to the next generation or to successful management.
What advice can you give to businesses looking to set up a good succession plan?
Find qualified advisers to help set up and implement each step of the plan. If the business succession plan is not done by process (planning), it will be done by crisis (failure to plan) -- with perhaps disastrous results.
Securities are offered exclusively through Raymond James Financial Services, Inc., member NASD/SIPC, an independent broker/dealer. They are not insured by FDIC or any other bank insurance, are not deposits or obligations of the bank, are not guaranted by the bank, and are subject to risks, including the possible loss of principal.
JAMIE RICHARDSON, RJ, is a vice president and branch manager for ViewPoint Investment Group, 1309 W. 15th St., Suite 400, Plano, TX 75075. Reach Richardson at (972) 509-2020 ext. 7410 or Jamie.richardson@viewpointbank.