Crafting The Business Succession Plan

By Norman A. Pappas
Author of Passing the Bucks
 

Dear Business Owner or Heirs:                                             

On behalf of your United States Government, thank you for giving us your business. We appreciate your not making any better plans to distribute the wealth you worked for so many decades to accumulate. We’ll do our best to spend it wisely.

Sincerely,
The Government

You’ll never get a letter like that one. You won’t need to. Without a proper plan for the future of your business, your business may not have a future. 

Just as your personal Will determines what will become of your personal assets; a business succession plan determines what will become of your business. And given the years of devotion and dedication you’ve put into it, the business might very well be considered another “loved one” that must be provided for.

The overall Plan consists of two parts: a Business Succession Plan, which is a long-term strategy for the business when the owner retires; and a Strategic Contingency Plan, which is a short-term strategy that becomes operational upon the unexpected loss of the owner, through the disability or death. Together, The Plan serves as an effective road map, steering the business’ passengers through the twists and turns of transition from one owner to the next.

Most business owners don’t realize the range of issues involved, and the problems that can arise when no plan – or a bad plan – is in place. Unfortunately, the complexity of the process and the difficult decisions that will need to be made, often cause the owner to postpone action. But the cost of not planning is high: over 70 percent of family businesses fail to survive into the second generation; over 85 percent fail before the third.

There are a number of pitfalls that trip up the best intentions of owners, families, and managers. They include:

• Personal issues (i.e., family issues as to how to deal with children working in the business and those not in the business)
• Key personnel issues (i.e., which employees will stay and who will go)
• Tax issues (income and estate)
• Legal Issues (buy-sell agreements)
• Financial issues (such as funding buy-sell agreements, retirement plans, and estate taxes)

In order to start the succession plan, you need to do the following:

• Determine your wishes for the future disposition of your business.
• Decide on a successor(s) or owner(s).
• Anticipate and address any family or employee issues.
• Begin to prepare the successor(s) for their future responsibilities.
• Set aside assets that may be required for the transition.
• Coordinate your personal and business finances to provide sufficient retirement income and fund any estate tax liability. 

Planning can be a complex process involving difficult decisions on issues, both professional and personal. But the rewards are worth it: A solid foundation for the survival and ongoing success of your business; security and peace of mind for owners, managers and employees; and, often, significant tax and financial advantages for both the owner and the business.

Succession planning should start the day you realize you have a viable business to pass on someday, not matter how far in the future that is. Don’t forget that your plan is not a “death issue.” It can and should be a “living issue,” that will work for you and your heirs for decades to come.

Norman A. Pappas is president and founder of Pappas Financial, The Enterprise Securities Company and The Enterprise Investment Company. He has extensive experience in solving the unique problems faced by successful high net worth individuals, business owners and corporations. He is a frequent guest speaker and lecturer and the author of several articles on various business and estate planning topics. He is the author of the book, PASSING THE BUCKS, Protecting your wealth from one generation to another.
You can contact him at:

Pappas Financial
30301 Northwestern Highway
Suite 200
Farmington Hills, MI 48334-3233
Tel: (248) 539-8282
Fax: (248) 539-8283
npappas@pappasfinancial.com