Succession Plans Help Future Generations Succeed in Family-Owned Businesses
By Laurie Burstein
No business owner will live forever and be able to run his or her business for eternity. At some point, the decision needs to be made to transfer the ownership and management of the business to someone else. That’s where succession planning comes in to tackle the tough issues such as leadership, ownership, and the operational changes that family-run businesses face when the founder or leader retires or passes away.
Jeff Smith, managing partner and co-founder of the accounting and business management firm of Brown, Smith, Wallace says, “Any family business that wants to survive past the current generation needs to have a succession plan in place. Without an effective succession plan, the business may need to be sold or merged upon the leader’s decision to leave or retire. This is not always the intent of the family leader and can result in significant power struggles, family quarrels, damage to the business, along with other problems.”
Smith says one of the most difficult aspects of developing a succession plan is getting the owner to stop being the owner. “It’s tough for owners to let go, especially if they were the original owner in a family business. But with a good plan that is begun at least five years before they plan to retire, owners can know that the business they built will be well managed or sold for a profit.”
 Ray Kreienkamp, partner
Blackwell Sanders Peper Martin LLP |
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Ray Kreienkamp is a partner at the law firm of Blackwell Sanders Peper Martin LLP and has helped many private companies with succession planning for the past 15 years. He defines succession planning as estate planning for business owners, but often with a lot of twists and turns.
“Succession planning includes two distinct but interrelated aspects. First, the operational aspect of succession planning must be handled by the business’ management. It involves establishing a process that recruits competent employees and trains them to manage the business as senior level employees retire,” Kreienkamp says.
“Second, the ownership aspect of succession planning is implemented with the help of the business’ professional advisors. The focus of this part of succession planning is determining who will own the business, how the business will be transferred to that person, and how that transfer can be accomplished with minimal difficulty and tax cost to the business owner.”
He adds, “My role as an attorney in succession planning is to provide counsel to the business owner regarding the most efficient and effective way to transfer the business based upon his or her goals. The attorney needs to listen carefully to the goals, needs, and expectations of the owner and help them understand whether or not their goals
can be accomplished given the status of the business.”
Doug Hazel enlisted the help of Kreienkemp to work out a succession plan well in advance of transferring the business from his father to he and his sister. Hazel went into business with his father almost 20 years ago and built a successful banking and real estate development company that is still active today. When his father passed away several years ago, Hazel says he was glad that there was a good plan in place.
“Although my father had a will, we worked carefully to put together a succession plan for the business. It took us a long time to develop the plan and there were many steps involved to do it properly. But it was very worthwhile,” Hazel says. At age 46, Hazel has two teenage children and is starting to think about putting a succession plan together for the next generation.
Robert Kluge,
CPA
Kluge, Kluge and sivcovich |
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Robert Kluge is another second-generation business owner and runs the CPA firm his father started in 1963. Kluge remembers when the office was run out of his family’s home and how office topics were often discussed at the dinner table. After college he went to work for his father and eventually assumed management of the firm in 1997. The company continued to grow and today Kluge, Kluge and Sivcovich serves 1,600 individuals in preparation of the tax returns,
and 400 owner-operated business clients doing payroll, bookkeeping, consulting, and income taxes.
As both a family business owner and an accounting professional helping others develop their own succession plans, Kluge knows many of the pitfalls involved such as only looking at a single aspect of the plan or not anticipating the unexpected. “Many plans only focus on the legal aspects such as buy-sell agreements, financial aspects such as life insurance, or emotional aspects like the oldest son should take over the business. Premature death or disability of the owner is typically overlooked. Other pitfalls include the misconception by the owner of the value of the business.”
“The most important things to keep in mind when doing a plan is to remain flexible in the design of the plan, review and update it on a regular basis, and not concentrate on any single aspect of the plan,” Kluge adds.
Attorney Larry Brody of Bryan Cave also provides counsel to family businesses tackling the big issues involved in succession planning. Brody says often it is a matter of getting all the family members in one room to talk about the issues and make some difficult, but necessary decisions.
“It can get very emotional when you are asking a business owner who has built up a successful business, ‘Who in the family will take your place?’” Brody says. “It’s hard to know if the owner can really give up control and be objective about succession planning when family members are involved.”
Brody says some of the big issues
that must be addressed include:
• Who does the owner view as his or
her successor?
• Should that person be given the
business or should they buy it?
• If purchased, should it be during
the owner’s life or at death and at
what price?
• How is the purchase to be funded?
What are the tax consequences to
the seller?
• If a gift, how is it valued for gift or
estate tax purposes and what are
the transfer tax consequences?
• How will other family members
be treated? Are there enough
other assets to treat everyone
fairly/equally?
• What is the business really worth,
either now or at the owner’s death?
Will they want to know and will they
pay for an appraisal to find out?
When a family cannot come to an agreement, Brody has brought in a psychologist to help the family work through these issues if the business is large enough to warrant the time and expense.
“If the family is ‘stuck’ on the plan for perhaps unconscious or unstated reasons, a psychologist can help solve family disagreements over succession and ownership in the next generation,” Brody explains.
Bob Merenda, CPA, and partner-in-charge of RBG’s Wealth Management Services Group, discussed how one family he was working with had four heirs who were all actively working for the family business when the original founder was made an offer
he could not refuse. “During the succession planning, it was determined that the best solution was to sell the company. However, this was an unusual case, as the owner used the proceeds of the sale to form a new company where all of his children had management positions.”
Merenda says there is a “soft” side to succession planning where the capabilities and willingness of the heirs to take over a family business must be assessed and may not be the right solution. “There are cases where family members are not the best ones to take the company and we recommend bringing in a non-family member to be the CFO or COO,” he says. Still other considerations involve how to compensate family members who are non-working owners through various means such as cash buyouts, setting up trusts or transferring certain assets—all in the most tax-effective way possible, Merenda adds.
Experts agree that the earlier the business owner begins to consider succession planning, the more likely the business will continue to be successful after the owner is gone. What brings many business owners to realize the need to start the process is that without proper succession planning, the business that they have built will not be as valuable when they are not active if they have not adequately provided for future management and ownership.
Kluge strongly identifies with this statement. “As a person active in the practice of advising people of business succession planning, I have been reviewing my own business succession plan. While having five children ranging from 13 to 21 in a blended family, my only hope left is my youngest son who seems to have the right skills. Not wishing to pin my future to the choices of a teenager, I am actively pursing options for my own business succession plan.” |
