Succession
- Three Tips to Ease The Transition
Author:
Don A. Schwerzler and David Jones
The
succession process can cause havoc in the family business and the family.
Especially if the process occurs only once and without a significant investment
in planning. Here are three ideas to help ensure success for your family
business. 1. Hire the most competent advisors (attorneys, accountants, financial
planners and family business experts you can find and afford.
Succession
planning is a complicated process and requires different kinds of expertise.
Not every professional service advisor has the special training and experience
necessary.
For
instance, few lawyers, accountants, family therapists and psychologists are
specifically trained or experienced in this field. You may wish to consider
using family business experts to act as a quarterback for the succession
planning process. All too frequently different advisors to the family business
owner
develop costly and ineffective sequential solutions to the complexities of
succession. If someone is selling elevators, escalators are usually never
recommended as a means of transporting people within a building.
2.
Business valuation is a critical element of succession planning.
There
are many reasons to value a business. Unlike socks where one size fits all,
one valuation does not fit all situations.
A
valuation for sale to the next generation of family has different formulas
than a valuation for sale to someone outside the family. Yet a different
formula would be used for estate tax planning purposes.
Depending
on the purpose of the valuation, costs can vary significantly. Less complicated
valuations done for planning purposes can be very affordable.
Some
family business owners value the business every year as part of their strategic
planning process. Others use the valuation as a means for determining performance
based compensation for key executives (phantom stock) rather than choosing
to dilute the ownership of the stock to a non family key executive.
3.
Funding is often a hidden or non recognized cost of succession planning.
It
is important to understand that the business may need to grow significantly
in order to pay the transition costs which include taxes, insurance, professional
advisors, setting up trusts and purchasing the business stock. Or, funds
that would be available for expansion or to pay out to the family will have
to be
retained in the business for the transition. Either way, planning for this
cash flow requirement will ease the
transition.
A
good rule of thumb is that the business needs to grow by at least 20 percent
more than the normal growth pattern to offset the costs of succession without
disrupting the profitability and cash flow of the business.
About
the author:
Don A. Schwerzler and David Jones ar Partners at the Family Business Institute
- a special resource for family-owned and closely held businesses (http://www.family-business-experts.com).
