As a family business grows, the owner must ultimately consider how the entity will prosper once he or she takes leave of the helm. With proper preparation, the change-in-command should go smoothly.

It will be important to determine which family members will be active in the business, what their roles will be, how they will be compensated, and what compensation inactive family members will receive. Your ability to entertain a variety of viewpoints and articulate your own interests is crucial to the success of these discussions.

What a Succession Plan Should Cover:

  1. It should take into account your (the owner’s) age and health, the expected rate of growth of the business, the ages of your spouse and children, and their abilities and interests. It should be flexible, as changes take place within the business and family.

  2. The plan should look at ways and means of designating your successor. It is important to provide on-the-job training and experience. Outside job experience, academic achievement, and preparation are also important.

  3. A succession plan should also consider stock transfers, which will involve careful evaluation of income, estate, and gift taxes. Transfer taxes may be reduced through use of the applicable exclusion amount and the annual gift tax exclusion, while stock options may be used to reduce income taxes. Extreme care and planning are required to avoid having stock transfers drawn back into the estate of the business owner.

  4. Your family should also discuss the structuring of a buy-sell agreement, entity agreement, or cross-purchase agreement funded by life insurance. If an unfunded plan is put into effect, the family owners who will ultimately be buying your interests may not have the cash or the borrowing ability at your death.

  5. will is also important. A solid business plan analyzes and accounts for the immediate, intermediate, and long-term goals of your business. The plan should be based on financial forecasts and budgets that consider changing conditions, as well as measure actual results.

  6. Consideration should also be given to the inclusion of non-family members on the board of directors to bring new ideas to the business. Oftentimes, they help as mediators, especially in the event of a family dispute.

A successful plan is one in which the needs of the family and the wishes of the owner are addressed in a way that moves all parties forward toward healthy future growth and accord.


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