Questions to consider in business succession planning
Tony Sablan, MBA
Your Partner in Building, Enhancing, and Safeguarding Wealth | Podcast host | Author
As a family business owner, planning for the future is crucial to ensure the continuity and prosperity of your business. Succession planning involves addressing key risks and making strategic decisions to safeguard your business's legacy. Here, we explore the critical aspects of business succession, focusing on mergers, acquisitions, and buyouts, with an emphasis on three primary risks: death, disability, and retirement.
For business owners, the potential impact of death, disability, and retirement cannot be understated. These events necessitate a comprehensive succession plan to determine the future of the business. There are three potential outcomes for the business upon the occurrence of one of these events:
1. Continuation
2. Sale
3. Liquidation
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Key Questions in the Succession Planning Process
To effectively plan for these eventualities, business owners must answer several critical questions:
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1. Will Successor Management Be Available and Willing?
?Successor management can come from within the family or from key employees. It's essential to realistically assess their abilities and commitment to continue the business. A positive answer leads to further considerations about the financial viability of the business.
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2. Would a Satisfactory Return on Business Capital Be Provided for the Family?
Determining what constitutes a "satisfactory" return is subjective, generally ranging from 6% to 20%. If the business can provide this return, it indicates a healthy financial state, making it feasible to continue operations.
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3. Could Tax-Favored Profits Be Withdrawn for the Family?
For corporations, paying a salary to a stockholder-employee is tax-deductible. However, these payments to a surviving spouse might be treated as non-deductible dividends. Ensuring tax efficiency is crucial for the business's financial health and the family's income.
If the answers to these questions are affirmative, the business has a solid foundation for continuation. However, if any answers are negative, the owner must consider other options.
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4. Is There a Strong Desire for Continuing Family Involvement in the Business?
Even if there are challenges in successor management or financial returns, a strong desire for family involvement can drive the continuation of the business. This scenario often reflects deep family pride and commitment to the business legacy.
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5. Would a Buyer Be Readily Available?
If continuation is not feasible, identifying a potential buyer is crucial. A binding agreement and adequate funding ensure a smooth transition. If no buyer is available, liquidation may be the only option, often resulting in selling assets at a significant discount.
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Hypothetical Case Study: The Impact of Disability on Succession Planning
Though this story is fictional, as a business owner, you may be able to relate or have heard of a friend going through this situation. Consider the case of John, the founder of a successful family-owned manufacturing business. John was instrumental in the daily operations and strategic direction of the company. One day, John suffered a severe stroke, leaving him unable to continue his duties. This unexpected disability forced his family to confront the succession planning they had discussed but never fully implemented.
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1. Will Successor Management Be Available and Willing?
?John's eldest daughter, Emma, had been involved in the business and expressed interest in taking over. However, Emma lacked the extensive experience needed to run the company on her own. The family decided to bring in a seasoned COO to work alongside Emma, ensuring she could learn and grow into the role.
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2. Would a Satisfactory Return on Business Capital Be Provided for the Family?
The family assessed the financial health of the business. With the right management team in place, they projected a return on capital within their satisfactory range of 8-15%. This financial stability allowed the family to consider continuing the business.
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3. Could Tax-Favored Profits Be Withdrawn for the Family?
The business structure was a corporation, and they planned to provide Emma with a salary while ensuring the profits were distributed in a tax-efficient manner. This planning was crucial to maintain the family's financial well-being.
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The answers to these questions were positive, suggesting that the business could continue under Emma's leadership with support. However, the family also considered their emotional connection to the business and their desire for Emma to maintain John's legacy. They decided to proceed with continuation, supported by the newly appointed COO and regular consultation with financial advisors.
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Even if all conditions support the continuation of the business, it's essential to evaluate whether family wealth and happiness could be maximized through a sale. Selling a thriving business while the founder is alive can often enhance family wealth and harmony more effectively than continuing the business under uncertain future management.
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Succession planning for family business owners involves making tough decisions about the future of the business. By addressing the key risks and answering critical questions about successor management, financial returns, tax implications, family involvement, and market conditions, owners can develop a robust plan that ensures the best possible outcome for their business and family.
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For more in-depth conversation on your financial and legacy goals, schedule a time to connect with me at your convenience to provide tailored advice and strategies. This approach ensures that you have the information of succession planning, leading to well-informed decisions that protect both the business and your family's future interests.
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Tony Sablan, MBA |?Wealth?Advisor*?
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*Financial Adviser offering investment advisory services through Eagle Strategies LLC, a Registered Investment Adviser and a?Registered Representative offering securities through NYLIFE Securities LLC (member FINRA/SIPC), A Licensed Insurance Agency. Financial Professional, New York Life Insurance Company. Eagle Strategies and NYLIFE Securities are New York Life Companies. Ultimate Wealth Strategies, LLC is independently owned and operated from NYLIFE Securities and Eagle Strategies or any of their affiliates. CA Insurance License # 0I29141?
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