Business Succession Planning May Be Easier than You Think

In a prior blog, we examined the role of entities in Estate Planning, focusing on entity documents that allow flexibility in allocating rights to profits and capital, shifting income and property appreciation from one generation to the next, and providing asset protection. That article examined what occurred when Estate Planning documents conflicted with the operating documents for the entity. This article will build on that theme and provide guidance regarding the transition of a business from one generation to the next or even further. Business owners have experience running the business and managing their employees, but often seem lost when it comes to creating a plan for what happens to the business upon their incapacity or their inevitable death. Succession planning plays a vital role in continuing a business, which often provides a necessary income stream for the family and, if not properly protected, can result in disastrous consequences. Statistics show that there are over 32.5 million small businesses in the U.S., which account for 99.9% of all U.S. Businesses according to the Small Business Administration.

Individuals create businesses for numerous reasons with many common threads, most significantly, that each needs a succession plan. This article will provide a roadmap for helping clients determine and implement that plan. Family members who act as both managers and owners make succession planning particularly complex. An attorney needs to understand that the family and business interests while often similar, aren’t always the same and need to adjust their advice and approach accordingly. Here’s a step-by-step approach.

Step one:  Encourage the family to have family meetings. Family and business owners need to practice open and honest communication, if they do nothing else, they must do this. Clear communication helps set expectations and guards against future litigation and family discord. Ideally, clients should communicate regarding the family and business goals, both short- and long-term. Having annual family meetings provides the right setting for participation and reminds participants of their familial relationships, even though they have a business together. By reminding clients of the importance of these meetings, attorneys add value for their clients. An attorney’s conference room provides a formal, yet neutral, location.

Step two:  Help the decision-makers identify key relationships. When an entrepreneur begins the business, that individual has multiple relationships with individuals both inside and outside the business and knows every detail of the business. Every decision begins and ends with them. As the business grows, the creator needs to involve others, but often does so when they have little choice either because their health or business has suffered. A qualified Estate Planning attorney helps entrepreneurs understand their limitations. The attorney encourages them to identify the important relationships and the long-term role that each of those individuals will play once the entrepreneur no longer makes every decision. Inevitably, the entrepreneur will discover what relationships work and what relationships need work. It also allows the attorney to open a conversation about the role other family members have in developing and deepening these relationships which will ease the transition from one generation to the next. Here again, the attorney adds significant value in helping or simply advising the client to consider these relationships.

Step three:   Create a plan. The business family needs to create policies and processes to govern the relationships among the owner and business family members. Again, talking through these issues and keeping open lines of communication helps set expectations and guard against disagreements that turn into litigation, or worse, cause irreparable family rifts. The parties need to consider governance, operation, and growth and the business, practical, and educational requirements for the next generation. Individuals should consider the compensation structure, both for outgoing owners and managers and their incoming counterparts. If you are wondering how you will help advise your client in all of these categories – the answer is you won’t! You will encourage conferences with other qualified financial and business advisors, accountants, and perhaps, therapists, to guide the family with these decisions. Sometimes the best advice is to find a qualified professional to help. Attorneys find trouble when they fail to seek help when needed, the same goes for business owners.

Step four:  Remind the client of the legacy their business built. Undertaking appropriate business succession planning helps protect and continue a family legacy. The senior generation built the business and by providing the next generation with the tools necessary for success continues to play a vital role in that business. The better prepared the next generation is when the transition occurs, the more successful the transition will be. Demonstrating confidence in the newer members cements the future success of the business by showing outsiders that they, too, should have confidence in the future of the business, regardless of who’s in charge.

To recap, even if you have concerns regarding putting a plan in place for your business-owning clients, don’t let it stop you. Start by reminding them that they need to create a forum for open, honest, and frequent communication about family and business matters, usually by having family meetings. Next, discuss which relationships work best, which need work, and who will manage those relationships going forward. Third, make introductions to other qualified advisors to help create a succession plan. Finally, remind entrepreneurs that the next generation’s success depends upon the confidence demonstrated by the prior generation. Business succession planning sounds scary, but with speakers like Tom Rogerson, who presented on “Building a Generational Legacy” at the American Academy of Estate Planning Attorneys’ 2021 Spring Summit, Academy attorneys have the tools necessary to guide clients as they navigate this topic.

Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com