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Practice Management > Building Your Business

Understanding succession planning fundamentals

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Many entrepreneurs who have family owned or closely held businesses say their most difficult challenges are deciding who will succeed the current generation and how to preserve and build the company’s value by providing for a smooth transition of ownership and management to the next generation.

Estate and succession planning decisions involve complex questions of law, tax and business planning, with decisions about the types of property to own, the form of ownership, and, for small business owners, the organization and operation of the business and steps for passing it along. The best way to build the plan that’s best for your practice is to work closely with your lawyer and other specialists who can advise you properly. Tax accountants, appraisers and bank trust officers provide other important sources of information that you should consider in the planning process. You must make the final decision about the organization and disposition of your business. It is essential that you be well informed about the choices that are available so you can make the best decision for you and your family.

It is critical to understand that succession planning is a process, not an event. And once the formal succession plan is in place, it must be an evolving, living and breathing document which is reviewed and updated from time to time to reflect changes in the marketplace, competitive conditions or in the health or capabilities of the current leadership.

Owners of closely held and family businesses are often too focused on day-to-day challenges, and they often fail to plan for the eventual transfer of the fruits of their labor to their families. Effective succession and estate planning establishes who will run the business after the owner (or a co-founder) retires or dies and how ownership will be transferred. The plan will include details as to how the owner will pass on the wealth accumulated and held in the company to surviving family members. Once developed, the succession plan should be reviewed annually and modified periodically as circumstances change.

The succession plan should also seek to minimize estate and gift taxes. At the same time, it must provide liquidity to pay these taxes and support the surviving spouse and dependents. Life insurance products are often used to cover the funding of these obligations; the plan takes advantage of wealth transfer strategies, such as gifts, trusts, and family partnerships, which can be used during the owner’s lifetime to transfer wealth to the family.

From a leadership perspective, the founding entrepreneur must be prepared to “relinquish the helm” without reluctance or regret. A strong message must be sent to the next generation, the employees and the customers that this is a decision that the founder made without duress or shame. The successful transition plan usually involves the founder choosing a fixed departure date (and really sticking to it), having a strong and independent team of advisors in place to support the new generation of leadership, and resisting the temptation to meddle or interfere. It is also important to have a fallback plan or alternative exit strategy if the new leadership fails (after a reasonable period of time), and to have a set of activities for the founder to pursue after departure which are rewarding and challenging.

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