Like most founder/owners, when Jeff and Sean started their booming tech business in their late 20s, the last thing on their minds was what would happen to the business should they eventually step away, or worse yet die. Twenty-five years later, the two are faced with the never-planned-for scenario: Jeff wants to cash out his shares; Sean’s wife filed for divorce and wants to liquidate her ownership shares, and there is no plan—or next-in-line leadership—to manage the transition while ensuring the longevity of the business.
Sound familiar? According to a 2017 Wilmington Trust survey of 200 small-to-mid-sized businesses, 58% of business owners have no specific succession plan. Like most founders, they enjoyed working together so much that they couldn’t imagine parting ways, and were far too young for their deaths to be a concern. They saw no reason to plan for the inevitable “when” moments that can cripple a business.
If you’re among those with no succession plan, it’s time you rethink the concept. Instead of solely a post-death planning tool, think of a succession plan as a road map to ensure that your goals for the business are realized after your involvement ends.
Well-designed succession plans give founders the ability to work for as long as they wish, while giving them the flexibility to transition out when the time is right, without worrying about compromising the foundations of the business they worked so hard to build.
Choose Your Own Adventure
First and foremost, succession plans start with a clear goal. Do you want to step away after reaching a certain growth milestone and turn the business over to a new leader, or to work for as long as you’re able and then liquidate to benefit a charity or your family? Having a clear goal in mind will guide how you set up your succession plan.
No matter your end goal, your succession plan should clearly identify who will take over the company when you leave. If an officer, partner or family member is not the choice, build into your timeline the search for choosing and grooming a new individual, perhaps an employee or someone from the outside. Depending upon the size of your organization, a formal training and leadership program is a good idea to insure your employees are equipped with the skills they need to lead your business in a way that is true to your vision.
Assemble Your A-Team
Now that you have a clear goal in mind, you need people to help you devise a road map to get there. These experts should include:
● An attorney to create the appropriate legal documents
● An accountant to advise on the tax ramifications of the plan you choose
● An insurance agent to plan for how you will have funds to pay for any taxes on your estate. Depending upon the goal of your plan there may be some insurance products to help ensure there are monetary funds to see it through.
Draw Up Your Blueprint
With your goal in mind, there are infinite possibilities on how you may get there. Here is a list of a few option to consider depending on your end goal:
Sell your business – If this means selling to specific officers of the company or the employees through an Employee Stock Ownership Plan (ESOP), keep in mind you may be hit with a capital gains tax. Consult your accountant and insurance agent on how much you can expect to pay and plan for how you or your estate can pay for it.
Transfer your business interest with a buy-sell agreement – This is a contract that arranges the sale of your business interests far in advance of when you may need it. The buyer will purchase your interest at fair market value at the time of a specified “event” be it your retirement, a divorce, disability or death.
Create a Granter Retained Annuity Trust or Unitrust – GRATs and GRUTs are irrevocable trusts to which you transfer assets while still obtaining an income for a given period of time. At the end of this period or upon your death, the assets in the trust go to the other trust beneficiaries. Alper Services uses a trust to benefit its employees and potentially to benefit certain charities if a specific event occurs in the future, as identified by our Founder Howard Alper.
Implement a family limited partnership – This is a good option when you want to transfer your business to family members. First, establish a partnership and then transfer the business to the partnership. Over time, you may gift your business interest to family members.
Keep in mind your business will change over time. It’s a good idea to review your succession plan every five years to confirm the key players and strategy you have chosen still match your end goal.
By rethinking succession planning, the process can actually enhance the excitement and satisfaction you enjoy from growing and leading your business. Knowing that the infrastructure and leadership are in place long after your departure, you can make commitments to family, clients and employees today that will endure well past your departure.
Alper’s Team of Experts can augment your specific plan with insurance programs that provide the stability and liquidity required for successful implementation.
Contact Mark Jacobson for help in planning your unique succession plan, MJacobson@AlperServices.com.