October 1, 2012
By Ben Hartman, HunterMaclean
Special to Elegant Island Living
“Even if you are on the right track, you’ll get run over if you just sit there.” – Will Rogers
One of the most important things any successful business owner can do is to plan ahead.
Creating a business succession plan is vital to ensure the continued stability of any privately-owned company. Whether you own a medical practice in Brunswick or a boutique on St. Simons Island, the overall goal is to plan for a smooth transition by establishing a solid framework in advance, reducing the potential for friction and disputes at moments already filled with stress.
A recent PNC Bank survey of business owners found that 77 percent of business owners have a will, but only 33 percent have a succession plan in place for their business. The absence of a solid succession plan can run an established company off the rails when a leadership transition occurs.
According to the U.S. Small Business Administration, only 30 percent of family-owned companies succeed into the second generation and only 15 percent make it to the third generation. Disputes over ownership or management often arise in the second or third generation of family businesses, leading to complex and often expensive legal proceedings.
When planning for the succession of your business, here are a few suggestions to keep in mind:
Create a buy-sell agreement. This legally-binding contract governs what happens when an owner dies, retires or wants to sell out. A buy-sell agreement controls important business issues including who can buy a departing partner’s share of the business, what price will be paid for a partner’s interest in the business or how the price will be determined and what events will trigger a buyout. This document will need to be updated periodically as situations and circumstances change.
Identify successors well in advance. If possible, limit ownership to family members who work in the company. This process may require buying out family members who are not part of the business. The next generation of leadership should have the opportunity to observe the business at close range in preparation for the demands that come with leading a company. Encourage your successors to remain faithful to the mission of the company while learning from past mistakes.
Transfer ownership on a tax-advantaged basis. There are a number of ways to transfer ownership interest on a tax advantaged basis. Annual exclusion gifts and value “freezing” techniques such as Grantor Retained Annuity Trusts and Sales to Grantor Trusts are employed to facilitate such transfers. It is important to coordinate the corporate plan with the estate plan.
Make the transition as easy as possible. Minimize disruption for employees as well as clients or customers. The goal is to make the transfer of power a seamless process that doesn’t cause any interruption in the day-to-day flow of business. Thought should be given to funding eventual purchases and the effect a purchase might have on the cash flow of the business.
Seek professional counsel. An attorney can oversee the succession planning and execution process, ensuring that the buy-sell agreement is appropriate and minimizing the potential stress on the business’s current and future leadership.
Ben Hartman is a partner at HunterMaclean’s Brunswick office who specializes in business succession, estate planning and corporate taxation. He can be reached at 912-262-5996 or email@example.com.
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