Name your successor
The most important operational question addressed in any succession plan is: Who will lead the enterprise? If yours is a family-owned operation, finding a successor can be difficult. Family members may be qualified but have no interest in taking the reins. Or they may be interested but not have sufficient experience.To deal with such issues, take time now to encourage and develop future leaders. Identify children or other key employees you believe hold leadership potential and expose them to all aspects of running the business.
Give them a well-defined path to find out what they need to do to become future leaders of the business. And create an environment in which they’re assured that their hard work and time spent learning how to run the business will be rewarded. Finally, establish appropriate fringe benefit and deferred compensation plans, as well as incentive pay, to help retain them until you step down.
Get your family involved
It’s important that you encourage the entire family, whether or not they’re active in the business, to participate in the planning process and to understand the financial and personal consequences of an unsuccessful succession.
A common issue is how to equitably divide assets among heirs when only some of them will have control of or receive ownership interests in the business. If there are sufficient liquid assets, consider purchasing life insurance to provide for any children who won’t be involved in the business, and give ownership interests only to those who will be involved. Or, establish a family trust to own and operate the business, so that the entire family shares the risks and benefits.
Listen to the experts
No matter whom you choose as your successor, get your CPA, lawyer, insurance advisor and a family business consultant involved. These experts can help you assess your circumstances and create a workable succession plan.
Your plan should create a management structure that will survive your departure and keep the business on sound financial footing while ensuring adequate liquidity to fund your retirement or a buyout. Make a buy-sell agreement a part of your succession plan. It allows you to restrict transfers of ownership interests. Finally, a well-designed plan can help minimize income and estate taxes.
Drafting a succession plan that meets all those goals can be a juggling act, but, without a clear plan, all the “balls” you’ve juggled over the years to build a successful construction business can quickly fall to the ground.
Start the process now
The earlier succession planning begins, the better — even if you don’t plan to retire until years from now. Developing and grooming your successor will take time, as will preparing your employees and managers to adjust to a new ownership structure.
Alternatively, the succession planning process might lead you to determine that handing down your business to family members isn’t the best option. If that’s the case, you’ll want to consider selling it to your employees through an employee stock ownership plan (ESOP) or selling it to an outside party. Both options also require planning well in advance of your retirement.
The bottom line is that the time to start the planning process is now.
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ABOUT THE AUTHOR:
Shelly K. Bedford, CPA, MST is a partner at Dennis, Gartland & Niergarth in Traverse City. She is a multistate tax specialist with significant experience with succession planning, family and closely held businesses, manufacturing, agribusiness and related industries. For more information, contact Shelly at 231.946.1722 or sbedford @dgncpa.com.