Do you really need to start the succession process now?

In one word: YES! 
The earlier you start the discussions, the sooner you get on the same page and the easier the process will be. Running a family business is complicated on many levels. This is especially true when it comes to preparing for a smooth transition of ownership, leadership, and governance to the next generation.

Letting the estate plan dictate how a business is passed on and the lack of a well-designed succession plan may cause many unwanted and costly consequences.  Not to mention has the potential to derail a closely held family business. 

The first thing to keep in mind is that estate planning and succession planning are not the same—they have very different goals. Generally, the goal of an estate plan is to primarily provide for the surviving spouse and subsequently provide for children equally. The goal of a business succession plan, however, is to ensure the business passes to the heirs who are active in the business. One of the big challenges involves addressing the needs of children who are active in the business as well as those who are not.

 Family members must understand that there is a difference between "equal" and "equitable." Equal distribution does not consider the contributions of the children who are active in the business and contribute to its success. This is where a family business should be aware of the important role that life insurance can play in smoothing the transition from one generation to the next.

But how do you get started?  Here are 11 tactics that have worked for my clients.

1.      Start with yourself:  Ask yourself the hard questions. 

• What legacy and values do you want carried through to the next generation and beyond? 

• What conversations do you need to have and with whom? 

• Are buy-sell agreements in place and understood by everyone?

• Have you defined for yourself fairness and equality in order to distinguish between inheritance of personal assets and ownership or leadership of the company?

• Have you established education policies for preparing the next generation of potential successors?

• Have plans been discussed and put in place for those who might feel trapped into ownership, might pressure the business for money or might not support the new leader(s)?

2.      Start early.
Conversations about succession with family members must be started early and in a proactive manner before members of the next generation begin planning their own careers or educational focus.  You don’t want the IRS owning your company because you never put a clearly laid out succession plan in place and something happens to you.  Most importantly, all family members should not only know, but understand the plan.

3.      Start with the vision and values which lay the groundwork for a sound continuity plan.
Reaching agreement on what the family wants (vision) and what is most important to them (values) can be a challenge and often takes time. The ability to articulate the family vision and values, particularly with succession planning firmly in mind, as a good first step in starting the conversations necessary to design a cohesive plan.

4.      Obtain a valuation of the business. The key to a viable succession plan is a formal valuation of the business. Basing any transfer, during lifetime or upon death, on a proper valuation helps to limit the chances that the IRS will contest the valuation, which would result in additional estate or gift taxes.

5.      Plan proactively for transition of shares.
Whether stock will be gifted or sold, it is best to create a cohesive plan for the redistribution of shares to the successor generation when the next-generation members are young.  Setting up trusts early can avoid costly tax mistakes.

6.      Transparency and communication are essential.
Rather than keep succession plans to yourself until the will is read, it’s important to be transparent with family members. Specifics such as how and when the shares will be distributed to the next generation and what qualifications are required for those in management and ownership should be discussed openly and while you still have input in the decisions.  Whether the company will be led by a family member or by someone outside the family, being clear about the qualifications for the position, and how they might be developed, is key to a smoother transition. A transparent statement of the requirements also ensures that next-generation members know how they can best prepare themselves for the future.

7.      Get an outside perspective.
Families in the process of succession planning share that an outside adviser can offer objective recommendations that can keep the process moving forward.   An outside perspective can help decipher emotion from fact and mediate when a discussion becomes stormy.

8.      Have a plan, plan B, and even plan C.
A succession plan should provide an alternative, or two, that can be implemented if the first plan fails. A family may have a clearly thought-out transition plan, but several situations could throw that plan into disarray: an untimely death, changes in the family, shifts in the economy, and more. With a plan B and C already designed, you would not have to start over.

9.      Prenuptial agreements are a fine idea.
While many business owners might not think of prenuptial agreements as necessary or helpful, the wisdom of these documents becomes clearer in the context of succession planning. Restricting ownership to direct descendants of the founder keeps the business in the family in the event of a divorce.

10.  Fair does not mean equal!
Children and grandchildren are quite effective at training parents and grandparents that “fairness” means equal distribution of assets. But this principle does not apply when it comes to dividing ownership shares or offering management positions to family members. The long-term needs of the business must take precedence in these cases.

11.  Create and adhere to a fair, predictable process.
A clear road map for the next generation regarding how they might best prepare to be effective and responsible owners, managers and/or board members is the foundation of a fair succession process. Developing it early will give them time to better understand the family firm and consider how they might best fit into the family’s vision for the business.

Formulating a succession plan is imperative to the continued success of a family-owned business over several generations. If the legacy of the business is important to your family, take the time to develop a strategic succession plan and start the process early.

Lovelynn Ivey Consulting can help.  Click here.