Succession – When it’s time to go, who will be on your business team?

With the right education and planning, transferring company leadership can be handled in a strategic and well thought-out manner. After years of helping business owners and families, I want to share some straightforward steps to help ensure a successful transition.

Why now?

Developing a succession plan sooner rather than later protects your family, your business and your employees. If you are not nearing retirement age, why would you need to have a succession plan?

Well, the most obvious answer is an unexpected illness or death. Other reasons are to improve your business valuation, to increase your time to focus on growing your business and to preserve the future of your business.

Since the business is typically your largest investment, you should invest the time to create a plan to protect the on-going business. It’s also important to note that a succession plan should be created for more than just the CEO.

Be sure to identify key responsibilities in your company and ensure a back-up plan for those roles as well.

If you can develop a talented team to execute the daily business operations, you now have more time to focus on strategic growth avenues.

It’s possible your business will sell for a higher value if the buyer is assured that the business has a qualified team executing the daily business without the current owner’s involvement. Most business owners also have a deep commitment to protecting their employees and planning for the future plays a key role in this.

Who’s on the team?

The first step in creating a strong succession team is thinking about the skills needed for the various roles of your business.

Then objectively review your current employees to identify those that fit the requirements. If you do not see the talent required in-house, you may need to bring in a placement firm to conduct a search outside of the company.

When it comes down to deciding who will be part of your succession team, go into it with your eyes wide open. Your plan may be to groom the next generation within the family, which can be an extremely positive experience.

However, other family members in the business can add more complexity to a future sale because a buyer may assume business valuation adjustments related to family involvement.

For example, the compensation for family members may be above or below market rate. Family involvement may also make the decision to sell the business more than just a business decision.

Even though you may be ready to retire, other family members may be at risk for displacement and find it challenging to replace the salary earned in the family business.

If your goal is to own the business long term for your family’s benefit, you should introduce your children to the business at an early age. It’s important to let them know the skills needed should they consider working in the business.

Set the family involvement guidelines well before there is a specific person looking for employment in the business.

For example, one family I’ve worked with decided that no grandchildren would be employed in the business before the age of 35.

They thought it was healthier to set the expectation and avoid any perceived unfairness in the future. This encouraged the grandchildren to gain experience outside that could be beneficial to a future role inside the family business should they choose to join.

Also be realistic about the potential for future stress on family relationships that could arise when family members are working in the business together.

Should I transfer ownership?

In Minnesota, an estate above $1.2 million in 2014 is subject to estate tax.

However, there is a special (often overlooked) Minnesota estate tax credit of up to $4 million for closely held small business interests, while the federal estate tax doesn’t apply until the estate is over $5.34 million.

If the business is the largest asset in the estate, you should have a plan for liquidity needed to pay estate taxes.

Gifting interests in the business during your lifetime can result in favorable valuation discounts on the retained ownership in the estate. Because retaining control is often important, we typically advise business owners to consider giving non-voting ownership to their children outright or in trust.

Some strategies can also be designed to provide cash flow to the initial owner for retirement or other needs. By making the transfers sooner in life, the future appreciation is also removed from your estate.

What will I do?

As a retiring business owner, it’s important to find a smooth transition into a balanced retirement life.

It can be scary to sell your business because you may be unsure if the next stage of life will be as fulfilling. For example, one business owner described his fear as, “I’m unemployable. No one wants to hire the guy who ran his own business to work for them.”

Even if you get a good price for your business, you may still worry that you don’t have enough money for your family’s needs long-term. It is a mindset shift to become dependent on an investment portfolio for your support rather than from a business that you controlled.

You may follow the path of many business owners who start another business.

There is no end to what you can do in retirement and everyone has different expectations. I suggest taking a break and thinking about your next chapter and all the possibilities.