A high school football coach knows that some of the team's most talented and experienced players will graduate each year, taking their skills and experience with them. A good coach does everything possible to make sure there are talented new players ready to move up.
Family business owners need to look to the future in much the same way through the process of succession planning. Some say it's one of the most critical challenges that a family business owner faces. Unfortunately, it is also one of the most often ignored, misunderstood, mishandled and otherwise neglected duties.
Why succession planning is important
At some point in the life of a closely-held business, the owner or owners should ask, "What happens to this company when I'm gone?" It doesn't matter if the owner's absence is due to retirement, death, disability or some other reason; if there is no concrete answer to the question, it is time to start planning.
By eliminating variables and ironing out details ahead of time, business owners and family members can generally realize a more favorable sale price, reduce tax liabilities and improve the company's chances of survival past the transition.
Why is succession planning so important to long-term success?
Dealing with family issues
In many family businesses, there are family members who expect to gain control of the business someday, and those who want nothing to do with it. But that's just the beginning of the potential conflict. Given sufficient time, family issues can be resolved. Left unaddressed, they are likely to hold the company back from its full potential.
There are many strategies for transferring assets to a new owner or group of owners. Transferring control is even more complex and challenging when family dynamics and relationships enter the picture. Emotions can overpower logic and reason. Planning and negotiations may eventually break down due to a lack of communication or an unwillingness to compromise.
Equal versus fair
As an example, consider the husband-and-wife owners of a manufacturing operation. They have three children, but only the middle child has shown any interest in the business. Even though they are not actively involved, the other two siblings are fully aware of the potential value of the company and expect that a part of it will one day be theirs.
The dilemma facing the parents is whether to transfer ownership equally among the siblings, or give controlling interest to the one who is involved in the company. As parents, they want to treat everyone equally. As business owners, they know that they need to do what is right for the future of the company. Giving equal interest to the two absent children may do nothing to advance the company toward its goals. In fact, it may do more harm than good.
Unfortunately, many owners simply decide not to decide. They may claim to be too busy, but in reality, they do not want to face the difficult choices. As a consequence, no plan is ever made.
Granted, these aren't easy choices. But conflict among family members can often be averted if issues are recognized and addressed early.
Ultimately, the goal of a family business succession plan is to minimize the inevitable disruption caused by ownership and leadership changes. That can only happen when the sketchy ideas in one person's head are formalized, discussed and refined into a well-defined plan. The best time to jumpstart the process is today. iBi
Mark M. Dalbey, CPA, is a partner in Clifton Gunderson's Peoria office. He has more than 12 years of experience and specializes in taxation.
