By Michelle D. Bennett, AIF®, CFP®, Executive Vice President, Newport Capital Group
Business owners usually have long to-do lists. They’re charged with making key decisions about growth. They scrutinize balance sheets on a regular basis. They’re thinking about new ways to scale, gain market share and stay competitive.
With the myriad responsibilities keeping owners focused on short- to medium-term needs and objectives for the business, there is often less time to think and plan critically for the long-term future. Specifically, what will happen to the business when key leadership exits the stage, and how can the family ensure financial security for the owner and heirs in the years and even generations following the transition?
Answering this question is at the core of business succession planning, which is the process of identifying leadership successors and putting plans – and documentation – in place to facilitate major transitions. A strong succession plan ensures that a business continues to operate smoothly throughout the transition, retaining its competitive edge while preserving its culture and values.
Business succession planning is important not just for the ongoing success of the business and preservation of multigenerational wealth but also for the U.S. economy at large. According to the U.S. Census Bureau, family businesses represent about 90% of American businesses, and they account for more than half of all jobs and GDP output for the economy. It’s essentially a national imperative that family businesses continue to thrive and grow.
For many families, the why of business succession planning is already self-evident. The business is often a critical component of the family legacy and a key source of multigenerational wealth. It’s the how of business succession planning that presents more challenges.
Like any challenging task, it’s best to address it in steps.
The first is to assess the business’s current and future needs and to take time to truly clarify the strategic direction of the company. As the business evolves, the vision and strategic direction may change – that’s OK. The point is to think about succession planning not as a one- time event but as an ongoing process that should begin well before a transition is expected. This level of preparation allows businesses to consider all variables and to develop and prepare successors gradually, ensuring they are ready when it’s time to transition.
Part of this preparation involves identifying key leadership roles, considering how these roles might evolve over time and deciding how family members might fit into the equation. As readers might expect, this aspect of business succession planning can be particularly sensitive, as it often involves family members jostling for positions and roles. Anyone who has seen the show “Succession” knows what a dramatized version of this looks like.
Families should stand firm on taking a dispassionate approach to finding ideal leaders, however, identifying candidates with the necessary skills, experience and leadership qualities needed to guide the business forward. This may mean recruiting outside of the family or even outside of the existing organization, which may ultimately provide the neutral path needed to avoid family conflicts and preserve relationships.
Once a successor is identified, the focus shifts to developing a formidable plan. Documentation is a key early part of this process, which should involve outlining the steps and potential timeline for the transition. The plan should also include formal training, mentorship and gradual shifting of responsibilities from the owner to the successor, which will provide real-world experience and allow the owner and successor to solve problems and implement ideas together. The document should be reviewed and updated regularly as circumstances within the business evolve.
Equally important to the longterm management of the business are the estate planning, wealth transfer and tax implications to the family. Whether the business is run by a family member, an external hire or even sold to an external buyer, it’s critical that the equity and wealth generated by the business is distributed to the family exactly according to the owner’s wishes – but also in a way that minimizes estate taxes and avoids disputes among heirs.
This piece of business succession planning involves addressing several legal and financial considerations, which may involve the sale of shares, gifting ownership to family members or perhaps setting up trusts. Transferring ownership of a business can alsohave significant tax implications, best navigated by financial advisors, legal professionals and tax experts. The result of these consultations and decisions will be legal documents, such as buy- sell agreements, that document the process for transferring ownership in the event of retirement, death or disability.
With a clear plan and documentation in place, the ongoing task for owners and families is to regularly review and update the plan to account for any changes to the business, family dynamics, and/or legal or regulatory changes. It’s also critical to keep all family stakeholders informed and involved, fostering an environment of clear communication and open dialogue to address concerns or objections. Perhaps the best way to frame the importance of business succession planning is to think about what happens in its absence: businesses risk instability, lapses in service and production, being overtaken by competitors and even failure when leadership changes. The imperative for owners is to be proactive in planning to avoid these outcomes, which means outlining a plan, choosing a successor and creating legal documentation to support the transition. A strong team of advisors can guide the process along.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. In addition, information presented in this presentation is believed to be factual and up to date, but Newport Capital Group, LLC does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.
This presentation includes forward-looking statements and opinions, including descriptions of anticipated market changes and expectations of future activity. Forward-looking statements and opinions are inherently uncertain, and actual events or results may differ materially from those reflected in the forward-looking statements. In addition, all expressions of opinion are subject to change without notice in reaction to shifting market conditions. Therefore, undue reliance should not be placed on such forward-looking statements and opinions.
The tax and estate planning information offered by Newport Capital Group is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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The article originally appeared in the October 17 – October 23, 2024 print edition of The Two River Times.
