By David A. Kubikian, Esq.
The word “succession” has become a larger part of our lexicon because HBO a few years back created an immensely watchable show about the cut-throat world of a family owned media company where hundreds of millions of dollars are at stake depending on who gets to take over when Dad leaves (or dies).
Entertaining? Yes. Realistic? Maybe. A learning moment? Definitely.
Succession is defined as being “the action or process of inheriting a title, position, property, etc.” Every business, regardless of size, will deal with a succession event if it is in business long enough. While family in-fighting on private jets may be reserved for the Roy family on TV Sunday evenings, the planning as to the who, when, and how your business transitions from one generation to the next (or not at all) is something that should take shape long before an actual transition happens.
To illustrate this point, consider a few common issues that come up:
1. The Estate Planning Angle. An all too typical scenario, the business, started by one generation has a younger generation heavily involved. One child seems to have the chops to continue to run the business once “Dad” hands over the reins (that is IF he ever hands over the reins). Another child is involved but not as much.
A third child has no interest in the business and in fact lives out of town. Dad’s estate plan is to treat all of his kids the same. That is, his Last will and testament or his living trust state that all assets held by the trust or governed by the will pass evenly to his “issue”.
Does this include the business? The technical answer is that it depends on how the business is structured and how it is owned. Whether the business has operating documents concerning the transfers of shares at death or whether there is a buy-sell agreement in place. In the event that the organizational documents reflect a certain chain of ownership, what impact does that have on the distribution of non-business assets via Will/Trust?
To further complicate things, the children who remain owners don’t see eye to eye on well, anything. You have seen it on screen but it happens quietly off-screen all the time.
Oh by the way, what about Mom? Did Dad leave the shares to her? Now what? The fact pattern quickly turns to chaos and dysfunction. No real leadership, no real vision. Create a plan.
2. The Non-Familial Heir. A similar scenario to the above fact pattern except the real “go-getter” at the business is not family at all. Dad’s right hand woman is a company lifer who not only knows everything about the business but has had to deal with Dad’s kids the last few years. The question as to the best interests of the company are likely different than the best interests of the kids. Dad’s business is his largest asset. Now what?
Again, not an uncommon scenario however one that needs even more planning and thought. Wanting the business to go to an integral executive/manager and wanting to leave your family the value of your business can be mutually exclusive ideas. Through agreements where the actual value or conceptual value of a business is set forth, Dad’s death or retirement can provide a pathway for the employee to buy the business from the family without drama. Create a plan.
3. The Question of Value. For a lot of businesses, particularly small ones, the value of the business is closely tied to the owner of the business. Business owners need to ask themselves this simple question: If you could not operate your business, how would that impact the value of the business? For many, they ARE the business. The inability to operate will mean there is no value. Machines and offices may be rented. Other assets may be leveraged. Your book of business may not be as valuable as you thought, particularly when the service can no longer be provided by you.
Have a business partner? When all is well, money is coming in and growth is apparent. Even if you have a wonderful operating agreement which makes sure to state the destination of shares upon an owner’s death, perhaps even with a set price tag associated with it, too often businesses do not have the liquidity to be able to follow through with the buy-out of the surviving spouse/family. The solution here is an old friend, life insurance.
When properly insured, a small business can proved an injection of cash that will allow an owner’s estate/spouse/family to receive money from the remaining owners without destroying the business. Create a plan.
The right path for your business will likely change multiple times as your business does as well. It is common for business owners to plan for success (the opposite of failure), growth, expansion, etc. Unfortunately, it is entirely common for business owners to fail to plan for succession.
Create a plan.