Succession - Three Tips
to Ease The Transition
Succession - Three Ways to Ease the
Transition
The succession process can cause havoc in
the family business and the family. Especially if the process
occurs only once and without a significant investment in
planning. Here are three ideas to help ensure success for your
family business.
1. Hire the most competent advisors (attorneys, accountants,
financial planners and family business experts you can find and
afford.
Succession planning is a complicated process and requires
different kinds of expertise. Not every professional service
advisor has the special training and experience necessary.
For instance, few lawyers, accountants, family therapists and
psychologists are specifically trained or experienced in this
field. You may wish to consider using family business experts
to act as a quarterback for the succession planning process.
All too frequently different advisors to the family business
owner develop costly and ineffective sequential solutions to
the complexities of succession. If someone is selling
elevators, escalators are usually never recommended as a means
of transporting people within a building.
2. Business valuation is a critical element of succession
planning.
There are many reasons to value a business. Unlike socks where
one size fits all, one valuation does not fit all
situations.
A valuation for sale to the next generation of family has
different formulas than a valuation for sale to someone outside
the family. Yet a different formula would be used for estate
tax planning purposes.
Depending on the purpose of the valuation, costs can vary
significantly. Less complicated valuations done for planning
purposes can be very affordable.
Some family business owners value the business every year as
part of their strategic planning process. Others use the
valuation as a means for determining performance based
compensation for key executives (phantom stock) rather than
choosing to dilute the ownership of the stock to a non family
key executive.
3. Funding is often a hidden or non recognized cost of
succession planning.
 It is important to understand that the
business may need to grow significantly in order to pay the
transition costs which include taxes, insurance, professional
advisors, setting up trusts and purchasing the business stock.
Or, funds that would be available for expansion or to pay out
to the family will have to be retained in the business for the
transition. Either way, planning for this cash flow requirement
will ease the transition.
A good rule of thumb is that the business needs to grow by at
least 20 percent more than the normal growth pattern to offset
the costs of succession without disrupting the profitability
and cash flow of the business.
Don A. Schwerzler and David Jones ar Partners at the Family
Business Institute - a special resource for family-owned
and closely held businesses (www.family-business-experts.com).
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