Succession Planning
Succession planning: What legacy will you leave behind?
As a leader, your natural focus is on the success of your company. It has been proven in study after study that the quality of leadership provided in an organization is directly related to the growth and performance of that company.
Providing key leadership through critical strategic projects such as succession planning is important not only to the short-term success of the company, but also for the long-term success in achieving the objectives of ownership.
One of the greatest concerns facing the ownership of closely held businesses is how to establish and develop an appropriate succession plan. What legacy will remain after the transfer has occurred?
Accomplishing these objectives takes a proper amount of planning, experience and time. Yet, in the end, the process and results can prove valuable and, yes, even profitable to the business.
However, as noted above, time is one of the required elements to develop a plan. And as most business owners realise, there is rarely enough time to accomplish day-to-day activities, much less the time to develop a succession plan. Ultimately, one of two options exists for every business owner.
- Either the succession of your business will be an event controlled and planned by you, or
- It will be an unplanned occurrence brought on by outside forces such as poor health.
As you probably realise, more often than not, scenario No. 1 results in a much more successful transition, both financially and emotionally. Failure to plan for orderly business succession often results in financial losses, and sometimes, even the loss of the business itself.
While the current Tax legislation has a favorable view toward elimination of Capital Gains Tax it is an opportunity to transfer your business in a tax efficient manner.
Making a choice
So what is succession planning?
It is not simply the transfer of the operating business from one generation to the next. This certainly can be one strategic route chosen by ownership, but it is simply that – one choice among many.
Succession planning is a process NOT an event. It is an element of working your business to ensure a structured and orderly transition takes place in a coordinated manner
Succession planning involves determining the choices you have to make with your business, the objectives of ownership (particularly personal objectives) in developing the succession plan, transaction and taxation planning, asset protection planning, and yes, finally, estate planning.
Because every action has a reaction within the process, the initial planning and development of the plan require technical expertise and experience.
Every successful succession plan begins with determining the objectives of the owners. With the objectives of the owners established, then the remainder of the plan can be developed. It begins with the old saying, “Begin with the end in mind.” Succession planning is not simply a plan that sits on a shelf and implements itself. As you realise, you and your business constantly are changing. Eventually, the needs and requirements of the business conflict with personal desires.
Before that occurs, the owner has to decide which path he or she chooses to follow. Do I want to sell my business? Do I want to develop a plan whereby I can transfer the business to family members or key management inside the business? Is my business a candidate to go public?
Or, finally, maybe I want to continue to grow and run the business and proceed under a strategic plan by which my business is the consolidator. Yet even with this final choice, we all realize at some point that current ownership will have to address one of the first three choices.
Business Valuation
Once the choice has been made as to which road to follow, another phase of the planning process may begin. A business valuation of the business entity is a critical piece of establishing the financial portion of the plan. The business valuation “sets the bar” regarding what value needs to be transferred.
The objectives of the owner and the purpose of the business valuation determine the appropriate standard by which to value the business.
It is critical to employ the skills of an experienced valuation analyst to ensure the process has a solid base from which to begin. Once the value of the business has been determined, the remaining portion of the financial plan may be addressed.
This is often the most critical step in the financial process. The structure of the transaction in terms of income tax, gift tax, estate tax and financing are critical to the success of the plan. As you can imagine, not all situations fit all possible solutions.
So it is critical to evaluate each option as it relates to the overall objective to the owners. There are many traditional methods by which this can be accomplished. In addition, there are newer methodologies and practices that will allow for the transfer of the business and often in a tax- tax-advantaged situation. The various elements of the financial plan ultimately can define the success or failure of the succession plan.
Within this financial plan, the professional must consider the structure of the transaction, a plan to address asset protection, financing, and income and estate tax situations. Ultimately, it is a combination of all these items that addresses the owner’s goals and desires.
How will Planning Your Succession help?
- A succession plan becomes an integral part of your overall business plan document.
- The succession plan will clearly map out what must happen for you to exit the business – how and when you choose.
- Putting a formal succession plan in place will help you:
– Survive changes in ownership and continue as a successful entity
– Identify and address family issues before they become disagreements.
– Minimise tax liabilities and maximise returns.
– Ensure an orderly transfer of control and competencies.
– Prepare the business and future leadership for transition.
– Your business will face an ownership transition one day.
Warren Buffett is quoted as saying:
“I have left enough for my children that they can do anything with their lives, but not so much that they can do nothing”