Business Succession Planning
According to recent figures published by the Small Business Administration, approximately ninety percent (90%) of businesses are closely held and family owned, but only thirty percent (30%) of those succeed into the next generation; and just half of those, a mere fifteen percent (15%), survive into the third generation. One can see that seventy percent (70%) of family owned businesses fail to succeed into the next generation.
One of the common themes woven through closely held businesses is that owners neglect to create a comprehensive succession plan or "exit-strategy" for themselves. As visionary entrepreneurs, owners labor tirelessly for years to create a financially solid and viable business that generates real wealth for them and their families. Frequently, the business is its owners' single most valuable asset, and much of its value lies within the owners' experience, contacts and specialized skill set. Put simply, the value of the business largely depends on its key individuals. What happens to the value of the business if its key people are no longer able to serve it? A second, closely related question is, "When I am prepared to leave the business how do I extract the value and wealth I've created in the business, from the business?" Once an owner asks these two questions, our experience has been that the client quickly realizes the need for, and the value of, a comprehensive business succession plan.
The most effective business succession plans are conceived at the formation of the business itself. It is never too early to consider creating a business succession plan. Typically, owners labor under the assumption that the plan focuses on the prospective purchasers of the business. Our belief is that this is merely one component of the plan. Will the successors be the owners' partners, the owners' children, a group of "key employees" already working for the business, or a third party (such as a competitor, key supplier or key customer)? Depending on whom the successors will be, payment terms and grooming considerations must be addressed in order to improve the chances that the business will survive. Detailed consideration must be given to the tax consequences of the structure of the deal in order to maximize the owners' return on their investment.
The goals of a typical business succession plan are simple: to make sure there is a successful transition from the existing owners to the new owners and to protect and/or extract the business' wealth created by the departing owners. When the current owners are no longer working for the business, either due to their retirement, death or disability, it is the carefully prepared business succession plan that ensures continuity for business operations and continued financial security for the departing owners and their families. Of course, there will always be client-specific circumstances that must be carefully considered when devising a business succession plan. Some of the factors to consider include whether a client must provide for a surviving spouse and family, and whether there are family members actively working within the business.
Experience has proven that the key to developing an effective business succession plan is to understand both the client's particular needs and goals. Through a series of meetings and conferences, both with the client and with the client's other advisors (i.e., accountants, insurance agents, financial planners, etc.), BMK will craft a tailored business succession plan that will achieve the client's goals based on the particular facts and circumstances of the client and his or her business. The process begins with the owner assessing his or her business and addressing a number of questions designed to sharpen the focus on the particular facts and circumstances of the business in question. Typical questions the business owner should be prepared to answer include the following:
- Do I want to walk away from my business when I retire, or do I want to slowly phase out of its operations? If I have partners who are remaining with the business after I leave, what are their thoughts and feelings toward my plan and what are my contractual obligations to them?
- Do I want to pass the business along to my family or key employees (insiders), or do I want to sell it to a third party, such as a vendor, supplier or competitor (outsiders)?
- Assuming I want to pass the business along to insiders, do these people have the business acumen to permit it to continue to thrive? Do all of the insiders get along with one another and, if not, what is the best mechanism to resolve disputes between them after I've departed?
- Do I need to extract wealth from the business to fund my retirement or support my surviving spouse and other family members? If so, how much do I need and what is the most tax advantageous structure for securing it? If not, am I inclined to "gift" my interest in the business to my family?
While these questions are not comprehensive, they are indicative of the type of questions a business owner must answer if he or she is to formulate an effective and meaningful business succession plan. Once the business owner's input has been gathered and focused, our attorneys will develop and implement a plan to achieve the client's goals. Techniques that are frequently employed include buy-sell agreements, irrevocable life insurance trusts, employment agreements for key employees, option agreements for equity purchases, installment purchase agreements, consulting agreements, employee stock option plans ("ESOPs"), deferred compensation agreements for key employees, phantom stock, and business merger and third party sales agreements.
Upon reflection, clients invariably conclude that a business succession plan is inextricably intertwined with the client's estate plan. This is because the business succession plan touches and is impacted by various aspects of estate, tax, real estate, retirement and charitable (if desired) planning. While some advisors do not realize the importance of the interrelation between the business succession plan and the client's estate plan, our firm prides itself on crafting comprehensive, client driven plans that encompass both business succession and estate and tax planning. Our plans are designed to provide your company with the greatest chance for continued success after your departure while simultaneously providing for your family's, financial security. We at BMK look forward to formulating a comprehensive business succession plan for you that will protect you and your family by protecting and directing the wealth you have worked so hard to create.