GBC members briefed on business succession planning

The first day a company opens its doors for business, there should be a plan for succession, according to CPA William A. Fitzpatrick. There is only one chance at doing this right – businesses need to understand the process and avoid frequent, common errors.

Failing to plan properly for succession can be costly, both financially and personally. However, with adequate time and proper planning, succession planning can be accomplished easily and profitably. Whether it’s selling, transitioning to heirs or merging with a competitor – a plan needs to be in place, Fitzpatrick told GBC members at a breakfast briefing on June 19.

Only one out of 10 family-run companies today succeeds into the second generation, said Fitzpatrick. “People don’t plan for succession for a number of reasons, including procrastination, too busy with daily operations, or there is simply no successor identified.”

According to the United States Small Business Administration (SBA), more often than not, the reasons are psychological. No one likes thinking about their mortality, and entrepreneurs are no exception. Some believe they’re too busy to plan for the day they will leave and consequently put off succession planning until tomorrow.

But tomorrow may be too late. Serious illness, disability or death can catch a firm by surprise. Such crises bring great upheaval, and it’s difficult to make rational decisions in the best interests of a company when emotions are running high. That’s why a well-thought-out succession plan — a kind of insurance policy — is essential to the continuation of a business, no matter what its size and structure, according to the SBA.

Get outside help with succession planning. Lawyers, accountants, financial advisors – there are many professionals that can help you put together a successful succession plan, said Fitzpatrick. There are even companies that specialize in family business succession planning, who will facilitate the process of working through both family and succession plan issues. A few key issues to address include:

• Emotions/family issues
• Identification of a successor
• Valuation
• How to transfer
• Legal considerations
• Tax considerations
• Financing

Succession planning seeks to manage these issues by setting up a smooth transition between you and the future owners of your business. With family businesses, succession planning can be especially complicated because of the relationships and emotions involved – and because most people are not comfortable discussing topics such as aging, death, and their financial affairs, said attorney Constandin Alivizatos.

The primary recipient or chosen successor will often determine the method used for transferring a business. The structure of the company is another factor that will influence the transferring method choice.

A few things to consider when determining how to transfer a business include:

• Planned vs. unplanned
• Who to transfer it to
• Legal considerations
• Tax considerations

“Gifting” is one planned succession option that allows the owner to transfer a business to the next generation over time — in a way that reduces or even eliminates any estate or gift taxes, said Fitzpatrick. Other planned options are asset or stock sales and ESOPs. A few unplanned transfers could be from death, disability, and shareholder/partner disputes.

Another transfer method most appropriate to closely-held businesses are “Buy-Sell Agreements” that enable you to safeguard your family’s financial future and prepare your company to go on without you, said Alivizatos.

“By planning today for the continuation of your business, you will help it succeed in the present and ensure its health long into the future,” said Alivizatos.

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