By Greg Crinion
One of the biggest challenges for a business owner is to consider how their company will survive, prosper and grow without them at the helm. Entrepreneurs strive to realize the value of building their business when they decide to sell. Whether by public or private sale, it is not a simple or quick process and it will never bring top dollar to the seller if conducted as a fire sale.
Every entrepreneur should have a detailed plan for the inevitable change in management and, ultimately, change in ownership of their business. This “succession plan” must detail who will succeed them in ownership, management and other functions of the business, timing of the transition, and under what circumstances. It involves introspection, analysis of the business and personnel, tax planning and legal preparation. The process involves in-depth and often times difficult decisions.
For example, an entrepreneur can leave stock in a corporation to those named in a will. However, from a practical perspective that ownership may have limited value if the entrepreneur is the sole executive and does not have a clear replacement identified. Of course, dying without a will only complicates the situation.
Proactive succession planning prepares the business management and employees for the day an entrepreneur retires or even dies. It is wise to assure that the management team has a detailed knowledge of the succession plan should the unexpected occur. Additionally, prospective owners should know their role and have confidence in and respect for the incumbent management team. The ultimate goal in an ownership transition is for the business to continue to operate and grow during the change.
In addition to a change in ownership, succession planning often deals with a change in management. One scenario is where the entrepreneur builds a successful business but family members are not interested or qualified to manage it going forward. Or, the founder wants to ensure the business continues for the benefit of family and employees but is not yet ready to surrender control. Profitable succession planning means having the right people in the right positions to lead the company into the future.
If the current managers function only as caretakers, the business will falter and lose value before the right leadership can be hired. In this instance, those same family members, who are not interested or qualified to run the business, are often forced to make decisions that may not be in the best interest of the company.
This often arises in a business where no planning is done because it can be overwhelming to the founder(s) or descendents to formalize. Say the founders want to transfer ownership and management of their business to their children. Timing of when the parents will step aside and the children assume management authority must be pre-determined as well as how that authority is to be divided among the children. Answers must be found to whether the children will pay for the ownership interests and, if so, the price, the source of the money and the timing on the ownership change.
A change in ownership may also be accomplished by a gift. A gift means the founders receive nothing from the transfer of ownership and requires planning to determine whether it will be taxable or non-taxable and what ownership will be transferred at what time. Sometimes the most difficult decision is for an entrepreneur to admit that their children are not best-suited to succeed them and that it would be more beneficial to transfer ownership to the children but recruit independent leadership to oversee operation and growth of the business.
Only through good planning can business values be retained upon the final transition of ownership or control. Until the deal is done, the company will continue to evolve based on market factors, personnel, ambitions and personal goals. As a result, succession planning can be an ongoing strategic initiative for an entrepreneur.
While there are multiple factors to consider, remember that tapping into professional tax advisors and legal counsel can assure a sound strategy, provide peace of mind and generate successful results.
Greg Crinion is a partner at Crinion Davis & Richardson LLP