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The Challenge and Opportunity of Business Succession Planning for the Family-Owned and Closely Held Businesses

 

I love entrepreneurs, they are very brave to take the risk required to create successful businesses. One of my favorite entrepreneurs recently sold his business to his son-in-law and everyone involved is very happy with the result. However, it was not a smooth path to this conclusion. Like so many in the marketplace, he was absolutely knowledgeable about his business but when it came time to selling he faced a steep learning curve. It was important to him that the legacy of his business and the good work he did lived on. He also needed a monthly income because most of his assets were tied up in the business. He considered selling to a native corporation, then he considered selling to his employees, neither of which met all his needs. We worked closely with his attorney to pass this legacy onto his family and do it in the most tax efficient way. Today we are honored to have Maribeth Conway of Garvey Schubert Barer give us a snapshot of the succession process. Maribeth has helped many business owners make this transition and save them the stress of navigating it alone.

Laura Bruce, CFP®, ChFC®
Direct
or, APCM Wealth Management for Individuals


Where to start?

Maribeth ConwayBusiness continuation and succession planning is one of the most challenging obstacles the owners of family and closely held businesses face. Despite recognizing its importance, most business founders do not give succession planning the attention it deserves simply because they do not know where to start.

To develop a successful succession plan, business owners should prepare a working document that can help them achieve their goals. Each owner should take the time to answer a series of questions related to business continuation and exit strategies. Once completed, the owners should meet and discuss their answers and concerns among themselves and with their key advisors (banker, CPA, lawyer, financial advisor). Doing so will help owners focus on where they are headed and allow them to formulate a strategy and agenda that achieves their goals.

The following questions can give business owners a useful framework to undertake succession planning and highlight the particular challenges they are likely to face.

  • Do you have a clear picture of how you want to exit your business? If so, please describe. (Retain? Gift? Sell? Liquidate? And, if so, to whom?)
  • What are your primary objectives in transitioning out of your ownership and operation of the business?
  • Is it your desire to see the business survive a transition in ownership?
  • Do you want to sell the business? If so, when? Today? In the next 2-5 years? In 10 years or longer?
  • Are you willing to sell the business for cash only or are you open to financing some or all of the purchase price?
  • What type of assets does the business own? What are the most valuable?
  • What are the biggest liabilities of the business?
  • What are the biggest risks to the business?
  • In what condition are the business’s current finances? Does the business maintain cash reserves to deal with changed business conditions such as the incapacity or death of an owner?
  • What do you see as the best opportunities for the business going forward in the short-term? What about the long-term?
  • What do you think would need to be done to ready the business for sale to a third party?
  • If you hand over management of the business to others, are you willing to continue to be involved (either through work or financial support)? Are you willing to serve in a purely advisory capacity? Could you?
  • Do you have any buy-sell agreements in place? If so, is it a cross-purchase agreement or a stock redemption agreement? What is the triggering event? And how is the purchase price value determined? (Set price? Formula? Appraisal?) What is the funding mechanism?
  • If you do not have any buy-sell agreements in place, do you think you should? What terms do you think would be fair and feasible? For example, how would it be valued? Would you allow payments over time? Would you charge interest?
  • Have you done any estate planning and, if so, does that estate plan limit options in planning for business succession? If not, do you expect to develop one as part of this succession planning process?
  • In the event of the divorce of an owner, what would you like to happen with the business ownership interest held by the divorcing individual?
  • How do you now resolve differences of opinion between the owners regarding the direction of the business?
  • Do you think your current management could run the business without you either temporarily or indefinitely?
  • Are any of your employees key to the continuing success of the business? If so, please describe what each of them does and who you think would be the most difficult to replace.
  • Do you ever want to pass on any ownership interest in the business to any employees or managers? Would any additional training be needed for your key people to be successful?
  • If you are considering passing on your business to key employees, how do you want to do that? By gift, sales or a combination?
  • Do you want to consider passing on your business to a combination of family members and key employees? If so, how? By gift, sales or a combination? What if not all family members are interested or capable of being involved?
  • Are any owners or family members key to the continuing success of your business? What do they do? Are they interested in the business? Should any not participate?
  • What impact will an owner’s disability or death have on the business? What about your key employees? Will surviving family members need funds from the business?
  • Do you want your family members to own or inherit part of the business at your death? If so, should your surviving key employees maintain control of your business?
  • If your surviving family members will not maintain control of your business after you die, should they be able to force the business or the remaining owners to buy them out? If so, what terms do you think would be fair and feasible? Would you allow payments to your family to be made over time? Would you charge interest?
  • Are you willing to split up your business during your life into multiple units for transfer to employees or family members (by gift, sales or a combination)? After death?
  • How and when do you plan on sharing your succession plan with those affected by it?
  • What other concerns do you have about succession of the business?

It is hard for business owners to decide the right time to step out of a business and how to do it.  Planning a business exit can often be emotional due to personal and family dynamics. But family and closely-held business owners should address business continuation and exit strategy planning sooner rather than later. Proper planning of this type takes time, sometimes several years.

There are many strategies and tools owners can select to accomplish their goals. A buy-sell agreement can control business interests in the event of divorce, disability, bankruptcy or substance abuse. Continued family ownership can be accomplished through lifetime gifts or transfers at death. Sales to outside employees or family members can be accomplished by transactions structured to provide on-going cash flow. Certain types of trusts can assist to provide instructions as to how to vote shares of stock in the event of an owner’s incapacity, or to transfer business interests to family members during life and after death.

Most strategies are not without drawbacks and some of the more common strategies have significant tax consequences. A thoughtful planning process and an open and constructive ownership meeting to discuss and weigh conflicting objectives will ensure that the chosen exit strategy meets personal, family and business goals.

Maribeth Conway
Owner – Anchorage

Please note Maribeth’s new firm and location:

Garvey Schubert Barer
2550 Denali Street, Suite 1502
Anchorage, AK 99503
www.gsblaw.com

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