If you’re a business owner, you have most likely thought about the future of your business. You might have even asked yourself questions like, “What will happen when I retire?” and “How can I pass the business on to my children?” To ensure the continuous success of your family business, you’ll need to think ahead. Here is the five-step process for creating and implementing a viable succession plan.
Step One: Establish Goals and Objectives
Before you create a succession plan, you’ll need to establish a vision for the future. What do you want your business to look like? Who should be in charge? Will your mission remain the same? You’ll also want to decide how involved you would like to be. If you intend to pass on the family business to one of your children, you have to be prepared to let the next generation take over. In return, successors should take your strategies and advice into account—without them, your business would not be what it is.
It is also very important for you and your successors to share ideas and develop a collective vision. Attorneys, CPAs, and insurance advisors can provide aid at this stage; they help you determine if the succession will be a buy-out or if it will use federal estate tax exemptions. They can also help you determine your cash flow needs after you retire.
Step Two: Establish the Succession Plan
After you establish your goals and objectives, identify active and non-active family members and their roles in the business. You’ll want to determine who will be the next generation of leaders. Since everyone has a different skill set, place individuals strategically, in positions that match his or her strengths. And be sure to identify non-family members who also are essential to the business. Develop a plan to ensure that they remain with the business both during and after the transition, and consider incentivizing them with production bonuses or phantom stock.
Step Three: Establish a Decision-Making Process
A viable succession plan also establishes a way to govern the business. This includes setting up voting requirements—does it require a majority vote to make decisions? Should a supermajority—75 percent of voters—be required for decisions about buying, selling, or merging?
Dispute resolution is part of the decision-making process. There likely will be some disagreements among family members, so it’s important to communicate with each other and avoid festering emotions. Your attorney or CPA also can help you and your family deal directly with conflicts.
Step Four: Create and Document a Transition Plan
The next step is implementation. During this process, you’ll revise or restate the governance documents, such as the by-laws or operating agreement. Make sure you have a buy-sell agreement set up, too, and a way to address the death or divorce of a family member, and the spouse of a family member owning shares. You’ll want to create agreements for non-family members who are key employees, and establish a buy-out plan that funds your retirement but does not starve the business of critical cash flow.
Step Five: Establish After-Transition Planning
Sometimes, after-transition planning can be the most important step in creating a viable succession plan. Just because you have implemented a plan does not guarantee that it will be successful; you need to continue to think ahead. Plan annual or semi-annual retreats, as they provide an opportunity for team building, brainstorming, and discussing strategic plans. Regular family meetings also help with communication and conflict resolution. They bring together the leaders of the company and non-active family members. Even if you—or another family member—is retired, you still provide knowledge and expertise. Your contributions as an individual with inside knowledge but no vested interest can be calming to those still learning how to manage the business.
Remember that a succession plan is not created overnight; it can take awhile to implement, so be patient and always, always, always communicate with your family. While conflicts can arise, your attorney can help you and your family members communicate with each other, voice your opinions, and find a solution for passing on the business.
To learn more about how you can transfer your family business, contact Stuart Boehning at 765-742-9066.
The content of this blog is intended to be general and informational in nature. It is advertising material and is not intended to be, nor is it, legal advice to or for any particular person, case, or circumstance. Each situation is different, and you should consult an attorney if you have any questions about your situation.