Plan Ahead for Your Company's Survival

Daniel Flynn

A family owned-and-operated waste hauler in the Northeast is on the verge of extinction - and it don't even know it.

Although this mid-sized "Mom and Pop" outfit is successful by most standards, it is fast approaching the end of the line: Mom and Pop, the majority shareholders, are in failing health, and their two sons, who have unequal stock ownership, are keeping the business running as a national firm edges closer and closer to buying them out.

This scenario was never part of the original owners' plan.

For some entrepreneurs, planning for the future means facing their own mortality. For others, it means singling out a successor from among children or valued employees. Since many owners' income and assets are tied up in their businesses, passing it on means not only relinquishing control, but also giving up financial security.

There are other problems that plague family businesses: sibling rivalry, squeamishness among family members when addressing tough business issues and a lack of talented or willing management to carry the business into its next generation.

To avoid causing a rift, many families just avoid the difficult question of what will happen to the business after the entrepreneur retires or dies. Although emotions are part of nearly every decision affecting the company's future, owners must assess their businesses objectively.

Failure to prepare for the future has been the death knell of many family businesses. Only about one-third of family owned or controlled businesses survive into the second generation, according to a study by the University of Pennsylvania's Wharton Business School, Philadelphia. And the odds of continuing into the third generation are even slimmer.

Waiting too long to put a business succession plan into place also can damage companies: Customers, creditors, suppliers and even employees grow nervous about whether the company will fall apart once the owner is gone.

Without a business succession plan, the executor and heirs of the deceased owner may be forced to sell the business at an undesirable price. Chances are, the heirs won't know the company's value, and if the surviving shareholders want to purchase the deceased's stock, they may have a personal interest in keeping the sale price low.

Similarly, an outside purchaser of the deceased owner's shares who is aware of the distressed nature of the sale also will have a bargaining advantage over the heirs.

Creating a Solid Succession Plan If you want to be in that one-third of businesses that survive, planning is essential. In essence, a business succession plan is a documented road map for your partners, heirs and successors to follow in the event of your death, disability or retirement. It can include:

*a strategy for distributing business stock and other company assets;

* buy-sell agreements;

*life insurance policies for estate tax liabilities;

* debt retirement schedules; and

* the division of responsibilities among successors.

A succession plan also may be used to orchestrate the sale of a business in the event that the children either are not interested or are incapable of running it. Even if an attorney has drafted a buy-sell agreement to handle issues of ownership and management upon a future transfer of the business, the agreement could contain traps. The transfer plan that originally was designed years ago for a fledgling business may no longer be appropriate for a current successful operation.

Above all else, a viable business succession plan is flexible. Business, family, health and partnerships can change at any moment. Owners should be able to amend their plans to adapt to changes that may lie ahead. Consider these examples:

* For years, your son has been active in your business. He's worked through the ranks, and his last three deals netted a hefty profit for the company. Now, your daughter wants to be in the business, too. Her legal background will be a big plus, but how will you divide ownership and leadership responsibilities between the siblings without causing family friction?

* What happens if someone on your management team suddenly becomes disabled and can't return to work? What if your partner and her husband divorce, and the settlement calls for a portion of your joint business assets? What if you need capital to take advantage of a sudden expansion opportunity? Is your business structured to handle unexpected changes and opportunities?

Create a plan that can meet the challenges of life's twists and turns.

Who Will Carry the Torch? As a small business owner, you wonder if there is anyone who can run your business with that same inimitable style and acumen as you.

The answer is "no" - unless you're there to teach that person how. By grooming a successor now, you can impart your knowledge and experience and be better assured of continuity in leadership style and, hopefully, profitability after you're gone.

However, picking a successor can be a minefield, especially if you have a choice of equally qualified children or employees. If you have more than one child involved in the business, you must decide which one gets to be boss and which ones merely get voting stock.

How will you divide assets equitably among your heirs if some are active business participants and others are off pursuing their own careers? The distribution of power and assets among siblings can be a highly divisive issue, even in the happiest of families.

Estate tax liability is of particular concern when the family firm is the major asset of the estate and may not offer liquidity. Estate taxes are levied on the transfer of an owner's property upon death.

Federal estate tax rates start at 37 percent on the first dollar over $600,000, rising to 55 percent on amounts more than $3 million. For an estate valued at $4 million, the government's take would be at least $1.65 million.

Your challenge: Divvy up business responsibilities and assets in a way that allows your business to survive while preserving family harmony. Once you've chosen your successor from among your children, the only hitch is keeping the others interested, loyal and productive despite the fact that they were passed over.

What if there are no likely candidates among family members or in your employee pool? That's a warning sign you shouldn't ignore. It might mean that your management style is hampering employees from turning into leaders. Or, perhaps your hiring and training programs are not successful. While it is difficult for any business owner to let go, training the next generation of leadership is the only way to protect a company's future.

Make career advancement and management training programs top priorities. With help from financial and legal professionals, create a succession plan that will give your business the solid financial and leadership base it needs to survive.