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.andnbsp; 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.
First published in 1999, an updated and re-published version of “Tax and Financial Planning for the Closely Held Family Business” is now available for preorder. Gary Zwick, a partner and CPA with Walter | Haverfield’s Tax and Wealth Management group, wrote and updated the book with James John Jurinski. Jurinski is an attorney and CPA as well as professor of accounting and law at the University of Portland’s Pamplin School of Business.
“Tax and Financial Planning for the Closely Held Family Business,” published by Edward Elgar Publishing, offers non-traditional techniques to help business advisors craft strategies for their clients. It also offers solutions to family businesses and their owners.
“This type of work requires the ability to nimbly apply not only legal, business and tax law principles, but also requires the advisor to be able to understand nuances of how families work in the context of the family business,” said Ronald Levitt, an Alabama-based attorney who focuses on business and tax planning issues for closely held businesses. “Zwick and Jurinski have found a way to pull all of those issues and nuances together in a book that clearly lays out the issues and problems that advisors face in representing family businesses.”
In the book, Zwick and Jurinski rely on their extensive experience in guiding family businesses through a maze of organizational, tax, financial, governance, estate planning and personal family issues.
Zwick and Jurinski also co-authored the book, “Transferring Interests in the Closely Held Family Business,” published in 2002 by ALI-ABA. This book is in the process of being updated and re-published by Edward Elgar Publishing.
Additionally, Zwick has written more than a dozen feature articles for major tax publications. He also wrote the chapter titled, “Property Received in Exchange for Services – Section 83” for the Lexis Nexis Online Encyclopedia. For many years, Zwick was the Tax Clinic editor of the August rotation in the Tax Adviser, the AICPA’s national tax publication. He is also a contributor to the ALI-ABA Practice Checklist Manual on Advising Business Clients II and the book, “Golden Opportunities,” by Amy and Armond Budish.
Zwick is a frequent speaker, both locally and nationally, to tax professionals on a variety of related topics. He is board certified in federal tax by the Ohio State Bar Association and former Chair of the Federal Tax Specialty Board of the Ohio State Bar Association. He continues to serve on the Federal Tax Specialty Board of the Ohio Bar Association. He was an adjunct professor of Wealth Transfer Tax and Estate Planning at Case Western Reserve School of Law and an adjunct professor of Tax Law and Wealth Transfer Tax at Cleveland State University College of Law.
To preorder “Tax and Financial Planning for the Closely Held Family Business,” click here.