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The Basics of Business Succession Planning

On Behalf of | Feb 27, 2014 | Trusts

Family owned and operated businesses have very unique, distinct dynamics that can severely impact the success of the business (and the unity of the family) if they are not addressed and properly managed. It is of critical importance that proper advance planning be implemented to deal with the retirement, illness or death of the founder(s) and/or other key family members. Of all the elements of effective business succession planning, perhaps most important 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 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 a family business:

Business Governance and Structure
Determine whether or not the family business has taken the steps necessary to maintain and honor its governance structure and policies. 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. Does each family member have specifically defined roles and responsibilities 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.

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? If properly drafted, these basic agreements often define the roles and responsibilities of the shareholders and members. They can also 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.

When to Start Planning for Succession
The founding member is often the driving force behind and epicenter of the family business. Discussing succession with a founder or a key family member can be a tricky and perilous endeavor, particularly if he or she has not considered the issue of succession. In such a case, the issue may be perceived as a threat to his or her authority and control. The attorney, accountant or financial advisor for the family business must not lose sight that the 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. The issue of succession planning should be raised at least 7-10 years before it is anticipated that a founding or key family member will need to retire and turn over control. Raising the issue during the course of regularly held business meetings will help lay the foundation for meaningful discussion of the issue. It is usually best for the advisor to raise the issue as one that is part and parcel of the day-to-day operations and mission of the family business. Planning for succession in a family business is often a difficult task that could take many months – if not years – to properly implement. Your advisor must develop a full and in-depth understanding of all aspects of the family business, also taking time to understand the hopes, goals, and financial and personal aspirations of all parties involved. Once implemented, however, the future viability and success of the business may be ensured.