News & Articles

Who Will Run Your Business After You?

Posted on Mon, Jul 13, 2020

If you're a business owner, do you have a plan in place that names who'll follow you as head of your company? You may feel you're too busy running the business today to waste time on long-term plans that seem so distant. But there may be more reasons than you think to make decisions, some of which will benefit you today. A well-thought-out plan will:

  • Allow you to shape the fate of your business,

  • Preserve the value of your business during a transition,

  • Reduce income and estate taxes, and

  • Minimize the risk of intrafamily discord, when children play a role in your business.

Whatever you decide to include in your business succession plan doesn't need to be cast in stone. But just like a last will and testament, while you can, you need to make your future wishes known, and still allow for changes during your lifetime. Depending on the particulars, you can modify your plan as circumstances change. The trick is to be careful not to make promises you might not be able to keep.

Also similar to creating a will, you don't have to reveal the full contents of your business plan to all impacted parties immediately, though some plans should be made apparent early on. That's especially true if you decide you'd like to pass your business to heirs and need to start preparing them for that contingency.

Are you wondering about the value of your business and how much it is worth? EHTC is here to help with our Transaction Advisory Services team. Email Erik Olson at eriko@ehtc.com or call the EHTC office at (616) 575-3482 for any business valuation needs, especially in West Michigan.

Define Your Bottom Line

Perhaps the most fundamental question that a succession plan needs to address is: how much value will you need to take out of the company to meet your retirement and estate planning needs? The answer will influence whether you'll need to sell the company or transition some or all of the ownership to your heirs, assuming you have heirs willing and able to do so. If transitioning ownership is the plan, you can employ technical experts to use tax-efficient strategies, such as gifting, to achieve that goal.  

If you lack suitable heirs, an alternative to selling the company to an outside buyer is trying to facilitate the purchase of the business by your key employees. That can't be accomplished overnight and typically involves "nonqualified" (limited tax breaks) executive compensation plans, loans and possibly a "key man" life insurance policy.

Suppose you aren't trying to pass the business on to your heirs and you want to pursue employee ownership of your company. A leveraged employee stock option plan (ESOP) could be a viable succession planning/ownership transition mechanism.

The ESOP trust borrows funds to purchase company stock from the business owner. Then units of stock are periodically awarded to eligible employees and, over time, vested. When those employees retire, their shares are repurchased by the ESOP, allowing those employees to benefit from any increase in the company's value. Meanwhile, the company makes tax-deductible ongoing cash contributions to the ESOP trust to cover the loan it took out to buy the owner's shares.

Secure Senior Management

Even if you expect to sell the company to an outside buyer, you could enhance and preserve its value if you downsize your role and transition management responsibility to your senior executives, including an heir-apparent CEO. Assuming the new team is successful, an outside buyer wouldn't consider your departure as big a risk to the ongoing success of the company or worry about the need to make immediate changes to protect the investment.

Unless you plan to sell or hand off your business to children soon, it's crucial to avoid planning solely by looking at the company as it's structured today. Think instead about how various functions will be performed before your departure.

Suppose, for example, you're thinking about stepping out of the picture in 10 years, and your business evolves along the lines you're hoping it will until then. Would your organizational chart look the same then as it does now? What new roles and areas of expertise will be required a decade hence to run the business successfully?

If your business today is too small to accommodate your adult children on the payroll in key positions, perhaps it will then. Keep that in mind as you start to build your succession plan. At the same time, give children enough of an opportunity to receive proper training and demonstrate their capabilities and passions. If they aren't up to the job, all stakeholders suffer, including your children.

Similarly, don't limit your planning to focus exclusively on a future CEO. Think about the next management tier, and who'll be filling those slots, and how they can develop the skills and experience to fill them well. Those decisions will be informed not only by looking at your company's present needs, but the challenges you expect it to face in the future.

A Place for the Kids?

Whether you expect leadership roles and ownership stakes to be assumed by your heirs or by key employees, those stakeholders need to play a role in the succession planning process. It's particularly critical in the case of children who may not have had much involvement with the company. In that situation, you can't make assumptions about their desires, nor their capabilities, when folding them into a succession plan.

In a privately held company, it's only natural for nonfamily member employees to wonder what will happen to their jobs when the principal owner retires. As noted, while you shouldn't make promises that you may not be able to deliver on, key players will be reassured about their future if they believe you value them and expect them to remain on board after you leave the scene.

Today is Tomorrow for Your Business

Your succession plan should be a general roadmap for the future of your business without you, as well as to help inform your decisions about the business today. While it will likely require some precise legal arrangements (such as trusts, employment contracts, life insurance policies and executive compensation plans), don't let the tail wag the dog. As noted, your succession plan can evolve as circumstances dictate. Having a plan is the goal, but don't paint yourself into a corner.
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Tags: Succession Planning, Business Succession, Valuation, Business Owner

Team Member Spotlight: David De Graaf, CPA

Posted on Wed, Jul 08, 2020
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Tags: Tax Planning, Business, Succession Planning, Team Member

Why Business Owners Don't Plan for Succession - and Why it's Critical

Posted on Wed, Mar 23, 2016

Many business owners procrastinate putting a well-conceived succession plan in place. The reasons are understandable. It can be difficult to plan for your replacement and deal with your mortality.

Read More

Tags: Owners, Succession Planning, Business Succession

Why Business Owners Don't Plan for Succession - and Why it's Critical

Posted on Fri, Mar 04, 2016

Many business owners procrastinate putting a well-conceived succession plan in place. The reasons are understandable. It can be difficult to plan for your replacement and deal with your mortality.

Read More

Tags: Succession Planning, Business Succession

Why Business Owners Don't Plan for Succession -- and Why it's Critical

Posted on Fri, Oct 31, 2014

Many business owners procrastinate putting a well-conceived succession plan in place. The reasons are understandable. It can be difficult to plan for your replacement and deal with your mortality.

Here are five of the top reasons why business owners don't have an exit strategy, along with the reasons why it's best to make a proactive plan.

Reason Number 1: No Time. Business owners are busy with the day-to-day tasks involved in running their companies. There are deadlines to meet and deals to be made. Succession planning can be done ... later.

Why this thinking is wrong: Waiting too long can cause the outcome to be less beneficial to the owner and his family. If a rushed decision is made, the owner may get a low price or pay more in taxes than he or she would if adequate planning was done. And in a worst case scenario, "later" may never come. An unexpected death or disability might result in succession occurring sooner than expected and without a solid plan, the future of the business can be placed in jeopardy.

Reason Number 2: Loss of Control. In some cases, business owners may not want to stop working for the companies they spent years building. Giving up control is difficult. Owners may worry they will be bored in retirement or their companies will no longer flourish if they are not in charge. So they hang on.

Why letting go is a better approach: The most successful exit strategy takes months or even years to complete. With proper planning, you may be able to secure a position after the sale as a consultant. If you want to pass on the business to your children or grandchildren, you can be involved in training them to help them achieve success. In other words, a proactive approach brings more control over the end result.

Reason Number 3: Ignoring Tax Issues because they are Complex. There are obviously a number of ways to structure a succession transaction. The most tax-efficient way depends on the company, the parties involved and when you sell (federal tax capital gains rates may increase in the future). The tax implications of a sale or transfer can be extremely complex.

Why it's best to get professional tax advice: You have to make several decisions that will affect the tax bill, such as whether to sell assets or stock. Your company may wind up with unknown, costly liabilities if the transaction isn't structured properly. Handling the sale in a tax-wise manner can save you a fortune in the long run -- not only with income and capital gains taxes but also with estate and gift taxes. Consult with your tax adviser well in advance of the actual sale.

Reason Number 4: Not Sure Who Is Going to Take Over. For many owners, there is not a clear-cut successor. Are there partners? Should you sell to employees via an Employee Stock Ownership Plan (ESOP)? Sell to a third party?

In the case of a family business, there are even more questions. What if some children are active in the company and others are not? Which child is going to run the company? Does the "heir to the throne" have the business skills to succeed? Will a formal succession plan cause family conflict?

Without all the answers, a business owner may do nothing.

Why this is a mistake: Without a solid plan, the company you spent years building could cease to exist. There are many options for ownership transfer. You can sell outright, sell to your children, gift interests to family members at a low tax cost -- and more. But if you don't explore the possibilities, you leave the outcome to chance.

Reason Number 5: Not Enough Retirement Savings. While building their businesses, many owners put off making adequate contributions to retirement plans. The result may be insufficient savings. Where is income going to come from during retirement -- especially if the owner wants to pass the company onto family members? Often, there is a conflict between wanting comfortable golden years and wanting to transfer the company to heirs as part of an estate plan. So the owner just keeps working.

Why continuing to work without a succession plan is a mistake: By planning ahead, you can take care of your retirement and your heirs. With certain financial strategies, you may be able to retire comfortably and plan for the eventual sale or transfer of the company.

These are just some of the reasons business owners procrastinate and why they need to have proactive exit strategies. Start well in advance. Assemble an advisory team that includes your accountant, estate adviser, corporate attorney, and possibly other professionals.

And if transfer your business to your children, urge the next generation to start thinking about their succession plans.

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Tags: EHTC Article, Retirement, Owners, Business, Succession Planning, Business Succession, Valuation, Newsletter, Articles