The Basics of Business Succession Planning

By: Anthony J. Enea, Esq.

Family owned and operated businesses have very unique and distinct dynamics that can detrimentally impact the success of the business and the unity of the family if they are not addressed and properly managed. Because of this it is of critical importance that proper advance planning be implemented to deal with the possibility of a serious illness or death of the founder and/or key family members.

As the attorney, accountant or financial advisor for a family business it will be important that you urge and guide family members to engage in advance planning for the retirement, illness or death of the founder(s) and other key family members. Doing so will often require a significant degree of perseverance as well as patience. Unfortunately, it is often not the issue family members are quick to address.

Perhaps of all the elements of importance to the implementation of an effective business succession plan is communication. Sadly, families that do not regularly have business meetings to discuss the day to day operations and mission of the business are often the ones that are hurt the most when a founder takes ill or passes away.

The following are illustrative of some of the issues that need to be addressed and steps taken to implement an effective succession plan for the family business:

A. Business Governance and Structure

Determine whether or not the family business has taken the steps to maintain and honor its governance structure and policies. Are they complying with their governance structure? For example, if the family business is a corporation have the shareholders had regular shareholder meetings? While this may appear to be a basic corporate governance event, it is often ignored by most businesses.

As part of the governance and structure of the business does each family member have specifically defined roles and responsibilities, and are those roles and responsibilities delineated in writing? One of the most common problems facing family businesses is that the key family members fail to delineate and manage their expectations as to the roles and responsibilities of other family members.

B. Shareholder and Operating Agreements

Does the family business have in place a Shareholder Agreement if it is a corporation or an Operating Agreement if it is Limited Liability Corporation or Partnership. These basic agreements if properly drafted often define the roles and responsibilities of the shareholders and members. They also can delineate to whom a shareholder or member can transfer and/ or sell his or her interest in the family business and the terms and conditions thereof. Additionally, they often contain provisions as to what will transpire upon the death or disability of an officer or member. If properly drafted, these agreements whether they be a Shareholders Agreement, Operating Agreement or Buy-Sell Agreement can play an integral role in delineating the options available and agreed upon terms relevant to a family members decision to sell or transfer his or her interest into the family business. Having delineated the terms and conditions of a transfer or sale of the interests of a family member will go a long way in preventing disputes in the event of the sudden illness or death of the founder or key family member.

It is important that the advisor develop a complete and thorough understanding of all aspects of the family business. This will go a long way in helping the advisor to implement with a successful succession plan.

C. When to Start Planning for Succession

Often the founding member of a family business is often the driving force and spiritual leader of the business. While others may play an important role, the founder is often the epicenter of all important decisions.

Discussing succession with a founder or a key family member of the business is often a tricky and perilous endeavor for the advisor. One of the most difficult considerations is whether the founder has him or herself considered the issue of succession. If he or she has not given it serious consideration, he or she may perceive the issue as a threat to his or her authority and control. It is necessary that the advisor not lose sight that the family business is often not only a source of the livelihood of the founder, but, most often the very reason for his or her own existence and self worth. It is their passion and a great source of their pride.

I suggest that the issue of succession planning be raised at least 7-10 years before it is anticipated that a founding member or key family members will need to retire and turn over control of the business. Raising the issue during the course of regularly held business meetings will help lay the foundation for meaningful discussion of the issue. I have found that it is best for the advisor to be the one to raise the issue rather than other family members. The advisor needs to approach the issue of succession as an issue that is part and parcel of the day to day operations and mission of the family business

D. Sample Issues that Need Discussion and Agreement

(i) When will the succession plan be completed by?

(ii) Once succession is completed what will be the new agreed upon control and/ or governance structure of the business;

(iii) Have the new roles and responsibilities of the new controlling shareholders and members been delineated in writing?;

(iv) Has a compensation package for the retiring founder and/ or key family members been agreed to?;

(v) Has the percentage of ownership interest of the remaining members and shareholders been agreed to?;

(vi) Has the compensation of the remaining members and shareholders been agreed to?;

(vii) Has the possibility of the critical illness or death of the founder and or key family members been properly addressed as part of the succession plan?;

(viii) Have all tax consideration (gift/estate/income/capital gains) been addressed relevant to the transfer of the founders or key family member interests?;

(ix) Has the possibility of the utilization of life insurance, disability insurance and long term care insurance been properly reviewed and considered?;

(x) Has the succession plan been incorporated into the estate and gift and tax planning of the founder and other key family members?

E. Laying the Foundation for the Future Success of the Family Business:

(i) Agreeing to and delineating a Mission Statement;

(ii) Scheduling regular and consistent business meetings;

(iii) Communication!;

(iv) Regularly reviewing and updating the roles and responsibilities of the shareholders and / or members;

(v) Regularly reviewing and updating the compensation and bonuses of the shareholders and/or members and key employees;

(vi) Regularly reviewing and updating the expenses of the shareholders and members to be reimbursed by the family business (often a tricky subject matter);

(vii) Agreeing to which family members will be permitted to work in the family business;

In conclusion, planning for succession in a family business is often a difficult task that requires that the advisor develop a full and in depth understanding of all aspects of the family business. It is also a task that requires the advisor to understand the hopes, goals and both the financial and personal aspiration of all of the parties involved. The process of gathering all of the necessary information as well as implementing the appropriate plan is one that could take many months if not years to properly implement. However, once implemented, the future viability and success of the business may be insured.

Anthony J. Enea, Esq. is the managing member of the firm of Enea, Scanlan & Sirignano, LLP of White Plains, New York. His office is centrally located in White Plains and he has an office in Somers, New York.

Mr. Enea is the Immediate Past Chair of the Elder Law Section of the New York State Bar Association.

Mr. Enea is the recipient of the 2013 "Above the Bar Award" as the Leading Eldercare attorney in Westchester County. This award is presented by the Westchester County Bar Association, Pace Law School, the Westchester Women's Bar Association, the Westchester County Bar Journal and the firm Citrin Cooperman.

Mr. Enea is a Past President and a Founding Member of the New York Chapter of the National Academy of Elder Law Attorneys (NAELA). He is also a member of the Council of Advanced Practitioners of NAELA.

Mr. Enea focuses his practice on Elder Law, Wills Trusts and Estates, Business Succession Planning, Partnership and Corporate Matters.

He can be reached at (914) 269-2367.