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Business Succession Planning

Sooner or later, everyone wants to retire. But if you own a family business, retirement isn't as simple as just not going into the office any more. Not only do you need to ensure you have a sufficient amount of money upon which to retire, you must consider what will happen to the business upon your retirement or in the event of your death. 

Upon your death or retirement, who will manage the business? How will ownership be transferred? Will your business continue, or will it be sold?

Business succession planning seeks to manage these issues, setting up a smooth transition between you and the future owners of your business. With family businesses, succession planning can be especially complicated because of the relationships and emotions involved - and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs.

Naturally, for many family businesses, family is the primary emphasis of succession planning. Whether you're thinking about the future management of your business, how ownership is going to be passed along, or taxes, you won't be able to help thinking about how your decisions will affect your family.

The family succession plan must recognize and accommodate the needs, goals and objectives of each family member. The family's goals and objectives then become the basic building blocks for the development of the succession plan for the family's business.

Perhaps this is why more than 70 percent of family-owned businesses do not survive the transition from founder to second generation. In most cases, the "killer" is taxes or family discord, both issues that a good family business succession plan will address.

Think of business succession planning as broken into three main issues; management, ownership, and taxes.

It's important to realize that management and ownership are not necessarily one and the same. You may decide, for instance, to transfer management of your business to just one of your children but transfer equal shares of business ownership to all your children, whether they're actively involved in operating the business or not.

The taxes component of succession planning looks at the minimization of taxes upon death. There are asset transfer tax strategies that will help you do this, and these strategies will be identified during the course of your planning.

The following steps are considerations that are paramount to a successful business succession plan:

Start your business succession planning early.
Five years in advance is good. Ten years in advance is better.  Build an exit strategy right into your business plan. The longer you get to spend on family business succession planning, the smoother the transition process is likely to be.
 
 
Involve your family in business succession planning discussions.
Open a dialogue among family members. This is the best way to begin the process of a successful succession plan — one where close attention is paid to the personal feelings, ambitions and goals of everyone concerned.
 
 
Look at your family realistically and plan accordingly.
You may want your first-born son to run the business, but does he have the business skills or even the interest to do it? Perhaps there's another family member who is more capable. It may even be that there are no family members capable of or interested in continuing the business and that it would be best to sell it. Examine the strengths of all possible successors as objectively as possible and think about what's best for the business.
 
Get over the idea that everyone has to have an equal share.
While this is a nice idea in theory, it may not be in the best interests of your business. Remember that management and ownership are separate business succession planning issues. It may be fairer for the successor(s) you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Or it may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children.
 
 
Train your successor(s) and work with them.
How can you expect your successor to take over and run your business successfully if you haven't spent any time training him or her? Your family business succession plan will have a much better chance of success if you work with your successor(s) for at least a year or two before you hand over the reins. For solo entrepreneurs, sharing decision making and teaching business skills to someone else can be difficult, but it's definitely an effort that will pay big dividends for the business.

If you want to pass your family business along to the next generation, putting off business succession planning is the worst thing you can do. A good succession plan can ensure that you have the funds you need to retire and that the business you have built continues to thrive in the hands of the next generation.

 


The attorneys of Langlais Law Firm, PLLC assist clients in Woodbury and Hastings, as well as the Twin Cities of Minneapolis and St. Paul and the surrounding Twin Cities suburbs, which include the counties of Dakota, Washington, Goodhue, Ramsey and Hennepin.



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