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Business Succession Planning Blueprint

by David Dvorak and David Mayer, Attorneys, Koley Jessen

For a moment imagine that your business has accepted a contract for a highly profitable job. Successful completion of the job will ultimately involve allocating the work among employees and/or subcontractors, engaging in business with your suppliers, working closely with your bonding agent and communicating with the customer. Additionally, you will be expected to have the ability to adapt to unforeseen challenges and changes in circumstances. On the other hand, would you even dream of having your subcontractors or other employees arriving at the work-site with no direction with respect to the specifics of the job or the identity of the suppliers and other key players? Unfortunately, the latter, haphazard approach is often the approach taken with one of the most important tasks facing a business owner: preparing and developing a business succession plan. Business succession planning is the systematic transfer of ownership and management of a business from one individual or group to another individual or group.

According to the 2007 Massachusetts Mutual Life Insurance Company – Kennesaw State University – Family Firm Institute American Business Survey, approximately 40 percent of business owners are expected to retire by 2017. Only 45.5 percent of those anticipating retirement by 2012 and 29 percent of those expecting to retire between 2013 and 2018 have identified a successor. Further indicating the pressing need for business owners to seriously tackle succession planning is that, according to the Family to Family: Laird Norton Tyee Business Survey 2007, almost 60 percent of the majority shareowners in family businesses are age 55 or older and almost 30 percent are age 65 or older. According to the Family Business Institute only 30 percent of family businesses survive into the second generation, 12 percent into the third generation, and a paltry 3 percent into the fourth generation. Business succession planning is a vital undertaking for the future possibility of success of such businesses and the continued employment of the current employees, but is too often ignored or dismissed with the assumption that “I have plenty of time” or “It will all work itself out when the need arises.”

To dispel any unrealistic perceptions, business succession planning is not a one-and-done proposition nor is it a one-size-fits-all commoditized product; it is a process that requires dedication, patience, time, open communication, willingness to address sometimes difficult family dynamics, and later modifications to the plan as circumstances change. A plan that is “perfect” when created may be less than ideal several years down the road.

Business succession planning involves several different components, all of which are necessary to create a plan that accurately captures and effectuates the owner’s desires and concerns. These components include estate planning, financial planning, succession planning (ownership and management), tax considerations (income taxes and transfer tax considerations), and non-tax considerations (business, economic, family, and emotional). What follows is a brief overview of the process.

The process begins with the realization by the owner that succession planning needs to be initiated and family discussions started. Next, a team is assembled to shepherd the planning process forward by assisting the owner. The early stages of the process usually include creating a basic estate plan, addressing short term goals or problems, and defining long term needs and goals. The next major step is to design and implement steps and tools to achieve the identified goals. Lastly, monitoring, refining, reacting, and updating the plan is an ongoing process after these initial steps have been completed.

Vitally important to the success of any business succession planning is the creation of a team and the facilitation of open communication among the team members. Team members include the business owner, attorney, accountant, insurance advisor, investment advisor, banker, the bonding agent and others. All of these parties are necessary as the activities of each can greatly impact both the likelihood the business survives and the achievement of the current owner’s goals. Furthermore, each team member comes equipped with different skill sets and bases of knowledge used to raise questions and further refine the settled upon succession plan. The bonding agent may not initially strike you as a necessary team member to the succession planning process; however, the importance of including the bonding agent cannot be overstated. Including the bonding agent in the succession planning discussions is critical because the bonding agent can assist in identifying potential problems and can work with the owner with respect to the surety.

As you can see from this blueprint, business succession planning requires a serious commitment from the owner as it involves a wide range of considerations that may change as time progresses. Furthermore, successful planning mandates that the relevant parties be brought together as a team in order to facilitate the open flow of communication among the team members; it is disastrous to leave a vital team member in the dark with respect to an owner’s planning as this may defeat or seriously impair the achievement of the identified planning objectives making all the hard work be for naught.