SUCCESSION PLANNING: IT'S NEVER TOO EARLY TO GET STARTED

Seasoned Professionals SUCCESSION PLANNING: IT'S NEVER TOO EARLY TO GET STARTEDEarly planning and careful consideration are keys to implementing a successful strategy fortransitioning your business to the next generation of leadership.Imagine Jane Smith is 60 years old. She owns ABC Company, which she started 30 years ago. Now, she would like to reduce her hours in the business. She has even begun to contemplate retirement. Jane has three children. One is active in the business, while two are employed elsewhere. Jane would like to keep the business in the family, if possible, while ensuring a secure retirement for herself. She wants to treat all of her children fairly in her estate plan.Jane’s scenario is a fairly common one. The fact that she has started to discuss her goals and objectives puts her ahead of most business owners. Nevertheless, her work is only starting. She must consider a number of factors as she formulates and implements her succession plan. Normally at this stage in the process, it’s important to meet with your financial advisor to discuss appropriate strategies. By bringing a wealth of in-house expertise and knowledge to the table, your advisor can help you review planning options that best fit your situation.Consider exit strategiesWhile Jane’s goal is to keep the business in the family, she should step back and look at the situation realistically, then plan for contingencies. She needs to consider whether any of the children have the qualifications and desire to take over the business, and who the ultimate decision-maker should be. She also should examine what the best exit strategy for the family would be from a financial point of view. In addition to the idea of transferring the business to the children, Jane should consider other options, such as selling to an outside party or to a group of key employees. Every strategy has advantages and disadvantages. Developing a list of these factors will help her make informed, rational decisions as she develops her plan.Tax Implications If not planned properly, the transfer of ownership of a business can have negative income tax consequences. Losing 30 percent, 40 percent, or more to taxes can severely impact the secure retirement that people like Jane desire. It is important to analyze each exit strategy, along with the type of transaction being utilized (outright sale, installment sale, part gift/part sale, etc.) to obtain a tax-efficient result.CommunicateWhen developing a succession plan, communication with family members and key employees is the surest way to avoid problems down the road. In Jane’s case, she should meet with her children to discuss their goals, making sure that the reasoning behind the plan is clear. Discussing the plan with family members allows them to have their questions answered and concerns heard. It makes the family feel that they had a say in the planning process. In a number of situations, the family’s advisor has assisted in the presentation and communication with the family and key employees. This helps provide an objective view to the succession plan. Communication with key employees is also important. Jane may have employees who hope to take over the business and feel qualified to do so. These employees probably are integral to the business’ current and future success. Discussing the plan with them and hearing their concerns is likely to make the transition more successful.Train and provide opportunitiesAny succession plan that transfers ownership to family members or a group of key employees requires proper training and opportunities for the next generation of leadership. This takes time and careful thought. Ideally, the process should start at least five years before the anticipated transition date. In Jane’s case, the child staying in the business needs to be seen by the existing employees as having the authority to make decisions. Developing the necessary leadership skills and qualities to carry on the business is critical.Coordinate with estate planning One of the key issues to address is the transfer of assets. With respect to the company, in Jane’s case, there are three basic options:

• Transfer a third of the voting stock to each child.
• Create non-voting stock to transfer to the child who isn’t involved in the business, and transfer voting stock to the other two.
• Tansfer liquid assets (now or at a later time) to the child not involved in the business.

The question Jane needs to answer is, are they trying to treat their children fairly or to treat them equally? These are different concepts. If the goal is to treat them equally, voting stock should transfer to all three. If the goal is to treat them fairly, the last two options deserve some thought.The question of fairness vs. equality obviously has implications for the estate plan, as well. The estate plan needs to be coordinated with the succession plan for the business if fairness is to be achieved.Consult with advisors As the succession plan is being formulated, Jane needs to bring her team of advisors into the planning process. Those advisors—attorneys, accountants, investment specialists, and maybe more—can serve as good sounding boards in addition to providing critical legal, financial, and tax advice about the succession plan. In more complicated scenarios, a formal succession-planning advisor might be brought in to coordinate the process.No one knows what the future holds. If you own a business, the biggest mistake you can make is failing to plan for its future. Proper planning forces you to identify and deal with issues that will arise when you’re not around. The process helps ensure that your goals for the business—and for your family—will be met.Brian Koopman, CFP®, CPA, CTFA, Trust Point, Inc., La Crosse, Wis.