Editorial ·
Family Business Succession Plan: Where to Start
A family business succession plan is a written plan for the handover. It says who will run the company, who will own it, and when each change will happen. A good plan also covers the owner's own exit, including what happens if the owner dies or cannot work.
To start, set your goals, choose and train a successor, put roles and dates in writing, and talk with advisers early. You do not need every answer on day one. A rough first draft is enough.
Why early planning pays off
The U.S. Small Business Administration (SBA) says planning ahead can help a business stay stable and prepare for tax bills. It can also make the handover of ownership as smooth as possible. The SBA adds that passing a family business to a new generation is often more complicated than it sounds. It says estate and gift taxes generally come into play.
Many owners wait anyway. The SBA notes that many small business owners have no exit strategy for disability, retirement or death. In January, the professional services firm PwC reported on U.S. family businesses. It says they too often have no formal succession plan, or only a loose one that is rarely revisited.
SCORE is a small business mentoring group that the SBA points owners to. It says the usual estimate is that planning should begin 15 years before you intend to retire. That gives your successor time to learn the business.
Set your goals first
Write down what you want before you write down names. When do you want to step back? How much income will you need from the business afterward? Should the business stay in the family?
Leading and owning are two separate handovers, and they do not have to move together. In PwC's survey of 100 owners and leaders of U.S. family businesses, 76 percent plan to hand the reins to the next generation. Just over half (52 percent) plan to pass on both ownership and management to family. Nearly a quarter (24 percent) plan to pass on ownership but bring in outside management.
Plan your own exit too. SCORE tells owners to outline their move out of the daily role and to start a retirement plan early. The SBA adds that a retirement plan, life insurance and disability insurance protect you and your family when you step away, by choice or not.
Choose and train a successor
Choosing a successor for your own job is hard, SCORE says, and the answer will not arrive overnight. The choice calls for a close look at every employee who might have the skill and ability to lead. If you cannot narrow the field, SCORE suggests asking your board of directors or a search committee. That can take some of the emotion out of the decision.
Check for drive and skill as well as family ties. In the PwC survey, 50 percent of U.S. family businesses said they worry that their possible successors lack the drive and ability to carry the business forward.
Then train the person on purpose. SCORE advises listing the main functions of the company and having your successor work in each one. It also says to let the successor learn, grow and make mistakes before taking over.
Put roles and dates in writing
Set a timetable for training and a timetable for shifting control. SCORE says you, your successor and your management team all need to know who is in charge of what, and when. It adds a warning: your successor cannot succeed if you routinely overrule decisions.
Write down each person's title, who decides what, and the date each duty moves. Then keep the plan current. PwC says a plan that is not documented and routinely updated can hurt the company's lifespan and near-term health. Plan to review yours at least once a year.
Handing over ownership takes legal steps, and the right steps depend on how the business is set up. The SBA says a sole proprietor has total control over the business and full rights to complete a sale. Partnerships, limited liability companies and corporations need extra steps. Because the steps are specific to each situation, the SBA urges owners to speak to a lawyer. Ask yours how to record who gets which shares and how relatives outside the business will be treated.
The 2013 tax numbers to know
The American Taxpayer Relief Act of 2012 became law on January 2, 2013. It removed the end date on the federal estate tax rules and set the top rate at 40 percent for people who die after 2012.
For 2013, the IRS says the basic exclusion amount is $5,250,000. That is each person's federal estate tax allowance, and taxable gifts made during life count toward it. The first $14,000 of gifts to any one person in 2013, with some exceptions, is not a taxable gift.
A family business you own at death is part of your estate. The IRS says the fair market value of business interests is generally counted as of the date of death.
This is general education, not tax advice. The IRS says estate and gift tax laws are considered some of the most complicated in the tax code. It strongly recommends that you see an experienced estate tax practitioner.
Talk with advisers early
A succession plan touches taxes, investments and the law. SCORE urges owners to bring in outside advisers such as an accountant, an attorney, and an investment or insurance professional. The SBA adds that you should engage your lawyer and even a business evaluation expert before you start on an exit strategy.
SCORE offers free advice from local mentors. The SBA points owners to SBA district offices, Small Business Development Centers and Women's Business Centers for counseling and training.
In your first month, write your goals on one page, list the people who could lead, and book a first meeting with your lawyer and your accountant.