Company Succession Planning 101: Address basic questions before selling closely held business

As seen in Crain’s Cleveland Business on January 14, 2017.

Closely held business owners know they someday need a succession plan, but most are focused on day-to-day operations and delay addressing the transition process. Company and family dynamics are unique to each situation, so there is no one-size-fits-all solution. Often, the hardest part is knowing where to start. The simplest way is to ask three critical, interrelated questions.

1. Who is involved?

Identify all existing stakeholders. Address which trusted stakeholders can continue operations. Those given management responsibility do not need to be the same people who take ownership.

Then identify (a) what additional training is needed to allow designated successors to run the business; (b) how to compensate successors to keep them incentivized; (c) what is needed to keep management personnel from being removed if they don’t control equity; and (d) a backup plan should preferred management exit the business.

If no one from the next generation can successfully take over, owners must search for outside talent or begin strategic planning required to prepare for a company sale to an unrelated buyer.

2. When to transition?

Most family owned business owners have identified a date (or age) when they want to walk away from day-to-day operations. Ask if current owners desire to remain involved in critical decisions going forward or if they want to exit without looking back.

Tax and estate planning may be required to ensure ownership transfer is completed in the most efficient manner. Consider if it is advantageous to transfer equity over time or implement a recapitalization to separate voting and economic interests.

Certain deferred compensation plans and insurance products are most useful when implemented in advance of retirement.  Your transition structure will drive these transfer dates.

3. How to implement the plan?

Economics drives most succession plans. Do current owners plan to give the company away, or do they desire a buyout? Do the proposed future owners agree to assume financial responsibility and ensure their elders get paid?

Knowing exactly who expects to be paid and in what amounts allows planning to maximize payout and minimize taxes. The succession proposal should be communicated to all parties before drafting documents.

Once there is sufficient consensus from all participants, the formal succession plan should be created through corporate agreements and estate documentation.

Experienced financial, accounting and legal counsel can provide options and identify areas of concern. A good succession plan will eliminate lingering uncertainties and ensure your company’s long-term future.

Jacob Derenthal is a partner in the Corporate Transactions Group of Cleveland-based Walter | Haverfield LLP.