Professional Perspectives: Business Succession Planning

by Greg Jones CPA, CVA, Partner,  Eide Bailly LLP

The vast majority of businesses in the United States are closely held, family businesses. As a Certified 6692Public Accountant in public practice, I have had the opportunity to work with hundreds of individuals who own and work in a closely held business. I’ve found that the personalities of owners vary. Some are entrepreneurs who have made (or lost) more money than I will see in a lifetime. Others are conservative, never borrowing money and preferring to take the safe road rather than risk everything. Regardless of their style, each successful business owner will probably ponder a question similar to this one: “Who will run my business when I am gone?” If you are that business owner, this question may keep you awake at night. It is a question in which the answer is usually unclear. Fortunately, there are solutions; the best strategy includes designing a succession plan.

Before a plan can be put in place, I usually ask my clients a few basic questions:

  • What role does your business play in your family’s life? Possible answers may include:
    • Providing income
    • Providing employment for family members or long-time employees
    • Providing an opportunity for family members to work together
    • Providing a family identity, such as a legacy from an earlier generation
  • What would you like to see happen to your business in the future? (To whom do you want to transfer the business to?)
  • What is the annual after-tax income you want during retirement (in today’s dollars)?
  • As it relates to your business, what would you like to see happen to your family in the future?
  • In your absence, is the company positioned to run without you?
  • How much time do we have to execute a plan? (What is your desired retirement date?)

Once the above questions are answered, an owner will generally know whether the business will be transferred to a third-party, key employees or family members.

A third-party (perhaps a competitor) can simply purchase the business from the owner. This transaction is simple and typically efficient. The sale can be structured to achieve the selling owner’s goals while limiting the tax burden.

In some cases, a business owner may want to transfer ownership of the company to a key employee or group of employees. This strategy can yield wonderful results if the management team of the company is strong enough to manage the business without the owner. A shortfall is that the key employee(s) may lack the funds to buyout the owner; the owner may end up financing much of the buyout.

In the case of a desired transfer to family members, harmony among the family is an important factor. It is not uncommon for one child to work in the family business while his/her siblings pursue other careers. This is a difficult situation and one that cannot be ignored. Too often I see a family business split several ways when the owner dies. The owner may know one child should receive controlling ownership in the company, but wishes not to upset the rest of the family by creating a succession plan. In a recent case, the son of a business owner, who already managed the business prior to his father’s death, was left with a minority interest in the company. Thus, he was forced to consult his siblings on every major decision of the company, even though those family members knew nothing about the business.

An important component to a business succession plan is to include it as part of a well thought-out and executed estate plan. Gifts of stock, for example, may be part of the succession plan and a part of the overall estate plan. Coordinating the business succession plan with the estate plan is critical.

Family meetings are always a good place to begin discussions about business succession. Additionally, open up communication with key employees and find out their goals. Find trusted advisors to help you work through the business, financial and emotional aspects of a business transition. The sooner you develop and implement a plan, the better the chances that your family and business will be successful for years after your departure.

Greg has more than seven years public accounting experience and provides tax planning and preparation services to a variety of clients, including oil and gas companies, manufacturers, professional service firms and closely held family groups. As a Certified Valuation Analyst, he provides business valuation services for clients in connection with estate planning, buy/sell agreements, partner disputes and employee stock ownership plans. Learn more about Greg here.