You worked so hard to get your family business to where it is today. The last thing you want is for it to fail because of a lack of business succession planning. In fact, less than a third of family businesses move on to the second generation, and approximately one-in-ten businesses survive to the third generation for this reason. If part of your overall asset portfolio includes a family owned business, you’ll want to be sure that you specify in advance what happens to it when you are no longer involved. But that is just the beginning. We’re discussing in this article what business succession planning entails and what you could do to avoid your business closing down abruptly if you die or become disabled unexpectedly.
What Is Family Succession Planning?
Succession planning is a multi-stage process which involves passing on your ownership and leadership of your business to others. It involves your transfer of skills, client relationship management, and your best practices to those succeeding you in your business. Companies big and small do succession planning to ensure that it does not slow down or abruptly stop functioning when you are not coming back.
Suppose that you have assumed a role in your business but your duties are not clearly stated. What if you have not put together a formal record of your business contacts or relationships? What if you have special skills which allows you to have a competitive edge, but which are not documented and protected. Even worse, suppose that you don’t have your business documents in order to show the chain of command in your business or the portfolio of assets held by your business? In these situations, your sudden or unanticipated absence could bring chaos and crippling misfortune to your business.
Succession planning strategies involve a structured system by which you transition out of your business but allow it to keep as much of its value as possible. In order to maintain this value, you must be able to plan for others – family members or otherwise — to possess your knowledge, abilities and skills relating to your business. Among other things, these people have to learn what you know, do what you have done, and leverage the skills that have made you competitive and successful.
Transferring Your Family Business To Your Children
In choosing one or more of your family members to take over your business, you’ll want to be sure that they are comfortable assuming your business role, are interested in learning new things, can accept uncertainty that might be part of your business, and are able to adapt to changes. Most importantly, they must be able to possess the very skills and expertise which has brought about your success.
At minimum, you should design a job position which covers all or a portion of work performed for your business. You should determine which of your family members might be most suitable for a given role based on the requirements of the job, level of control and other aspects. Also, you’ll want to establish standards by which you could judge the effectiveness of your family members in assuming your responsibilities to keep your business performing well.
Laying The Right Framework Regardless Of Who Takes Over
Succession planning is not really about transferring your business to your children just so they can sell it. Rather, it is about identifying and acquiring the right people for your business whether they are your family members or not. And it’s not just your position that might need to be replaced one day. Think of those who you currently work with. Are their duties and responsibilities defined? Do they have unique skills as well? What happens if one of them leaves the company unexpectedly? Consider each person’s role in the company and contemplate how the departure of each person affects the company’s operations and bottom line. This will make clear for you what type of role will need to be filled, and the training that might go along with performing that job well.
Also, consider in advance who you would like to fill certain roles if they become available. It is best for you to make your succession candidates aware that you have them in mind, and to invest in the development of those who you seek to hire. If one or more of your family members will occupy a business role, make sure that they become acclimated to the role by performing some or all of the job functions under your watch. In fact, you could have your successor begin to take over your role slowly but surely by mastering one task at a time.
Further, you should consider consulting with someone who has a human resources background who can manage the hiring of people in your business. You might find that none of your family members wants to assume a role in your business and would rather sit tight as investors. If you want to keep your business afloat, then you may have to recruit people months or years before your departure.
How Business Succession Planning And Estate Planning Overlap
Part of business succession planning overlaps with estate planning. Namely, with business succession planning, you are developing, training and supporting your successors; delegating responsibility; and maximizing employee retention. Conversely, estate planning deals more with the transfer of ownership of your business interests, while also taking into account things like who will manage your business, what is in the best interests of both your family and your business, and when transactions should be effected.
An experienced attorney can help ensure that your business is properly established, that your succession plan is in order and ready to be carried out, and that you are in a position to transfer your business to your family members in the most practical and tax efficient manner.
Uncertainties About Disability, Death
Your estate planning attorney can help you determine how much ownership and control to provide to your family members. The attorney can also help you plan against disability risks in case an injury or illness prevents you from managing the business. For example, it might make sense for you to use planning systems such as trusts, family limited liability companies, or corporations to protect your business assets.
Estate planning attorneys can also help your business bypass the probate administration system – a court-driven process that can be unnecessarily public, costly, and time-consuming . They can help you determine how best to transfer your business to reduce estate tax exposure, such as by effecting a discounted sale of your business. This especially makes sense if you anticipate that your business will increase substantially in value between the time that you plan your estate and the date of your death.
Advanced Business Succession Planning To Reduce Uncertainty
An estate planning attorney may recommend a buy-sell agreement if you share business ownership with another shareholder or partner. A buy-sell agreement may include a plan for a remaining owner to purchase the business ownership share of a deceased or disabled owner.
For more than two decades, the attorneys at Hawkins Elder Law have helped countless clients with preparing estate plans that are tailored to their needs and which provide for the effective management and distribution of their assets including the family business. Founders Jennifer J. Hawkins and Jeff R. Hawkins are Board Certified Indiana Trust and Estate Lawyers, certified by the Trust and Estate Specialty Board. Speak with Hawkins Elder Law today by calling (812) 268-8777 or by contacting us online.
About the Authors
Jeff R. Hawkins and Jennifer J. Hawkins co-author the Hawkins Elder Law blog with Thomas E. Hynes, a lawyer who is admitted in Pennsylvania, New Jersey and Florida with a background in estate planning and elder law.
Jeff and Jennifer Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers. They are also active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois.
Jeff is a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation. He is also a member of the Illinois State Bar Association and the Indiana Association of Mediators. He served as the 2014-15 President of the Indiana State Bar Association, and he is a registered civil mediator.
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