You built up a successful business. Your clients are happy. Your family is happy. You begin to wonder how long you can keep the dance up. You’re thinking about passing baton-
An important aspect of building a successful business is succession planning.
A few questions to ponder on.
As the business grows, is there a plan in place to protect the business assets if the owner(s) is hit by the proverbial bus? Is the owner(s) reaching retirement age and considering giving the business to family members? A succession plan provides the business owner peace of mind and, similar to estate planning, is best formulated early in the process to avoid potential misunderstandings down the road.
Recently I spoke with Steven Eliach, JD, LLM, a 25 year veteran and Principal-in-Charge of the Tax Practice at Marks Paneth, a prestigious accounting firm in New York City. Steven has extensive experience in developing succession plans for middle market clients and offered his insight into the process. While Steve is not creating the actual succession planning documents, and does not present himself as a succession planning attorney, by using the resources of his tax partners, he is instrumental in the design of the plan and plays a key role with an attorney to make sure documents are not cookie cutter. His goal is to make sure that the clients values are captured in the legal documents.
The first step in formulating a succession plan is for the owner to be willing to admit that he or she needs a plan. Business owners are successful entrepreneurs and like to be in control. It is difficult for them to let go or transfer ownership.
The attorney or attorney team start with a meaningful discussion with the owner to allay fears and learn the background of the business and organizational set up. If there are children involved in the business what is their role now and in the future? If all the children are not working in the business, how does the owner divide up the business among the heirs? It is much better to work through any sibling controversies and set up an operating agreement when the parent still has control of the business. Attorneys like Steven Eliach, with extensive experience in succession planning, can ease this process by proposing creative solutions to potentially hot button issues among family members.
If one sibling does not want ownership then perhaps an insurance policy buys out their part? If one sibling is the CEO then they should continue with their salary and incentive package just as if an outside person were hired for the role. There are many possible resolutions to issues when the planning is done thoughtfully and with full disclosure.
There are as many permutations of succession planning as there are businesses and the process requires due diligence on the part of all involved. What is the liquidity of the business? How will taxes be paid? What are the obligations of the business? Buy/sell agreements and/or Partnership agreements need to be prepared as well as stockholder agreements, compensation agreements, wills and trusts. The document that summarizes what everyone agrees to is the Memorandum, similar to the financial or estate plan.
In sum, for peace of mind a successful business owner must look beyond today and plan for the future transition of the business in order that the years of hard work leading to financial prosperity is preserved for future generations. This is best accomplished with the skill and expertise of a trusted advisor.
It will be time to pass the Baton when you are ready to hand the business off to another leader who will take your place. When you are ready to coach the new leader and ready to begin a new adventure you will be ready to pass the Baton. It’s kind of like learning to learn a new song to sing; you take a deep breath and you just let go.