Philadelphia PA Business Succession Planning Attorneys
No company can survive without an able owner or manager at the helm. In the event of a key person’s sudden death, illness, or retirement, businesses are often left scrambling to find a suitable replacement. Large corporations and small businesses alike can avoid a tumultuous transition by establishing a succession plan with a knowledgeable attorney.
Without a Plan
If an owner or shareholder does not have a succession plan in place, his or her stake in the company is either passed on to relatives as part of the estate, absorbed by other shareholders, or a combination of the two. In family-owned businesses, this often leads to disputes between siblings and other relatives. Those more active in the day-to-day operations of the business may feel entitled to larger shares than others who are less involved.
In larger corporations, employees and clients may leave the company for fear of instability. Additionally, without prior planning, remaining shareholders may not have sufficient resources needed to purchase the shares of the exiting or deceased shareholder. This can lead to a situation where a spouse or child of a deceased shareholder attains an ownership stake in the company which can result in disputes, stalling progress and possibly leading to a loss of assets. Furthermore, if the exiting shareholder had a management duty, her replacement may not be equipped to take over her role through such a delicate transition time.
With a Plan
An attorney with expertise in business and estate planning can help owners and shareholders put together a plan that facilitates a smooth transition. Plans are customarily created after employees, coworkers, shareholders and family members have been consulted and goals for the future of the company have been outlined.
Succession planning can be tailor-made to fit any business model and should address the following issues:
- Keep the business or shares within the family. With a retention plan, a spouse, children, or other relatives can retain control of assets.
- Offer shareholders or vital employees a larger stake in the company. Interested parties stipulated in the plan will be granted the right of first refusal, or the ability to accept or reject the shares of the exiting or deceased owner before they are offered to individuals outside of the company. The price of the shares can be determined by a valuation mechanism agreed upon during succession plan negotiations. For example, a valuation mechanism may require that shares be offered at their prevailing market value, or require multiple professional business valuation appraisals
- Address issues related to your estate plan as well as minimization of potential estate taxes.
- Preserve “institutional memory” when you or other current managers are no longer running the show. For example, you can empower advisors to aid the transition team and ensure continuity, oversee day-to-day operations, provide provisions for heirs who are not directly involved in the business, and provide education and training to family members and key employees who will take over the company.
- Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company.
- Implement a family employment plan with policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
Other arrangements can be made that would transfer the owner or executive’s interest into trusts to be paid out to family members. Assets may also be divided among employees or in other cases, it may be best to sell the company. With so many factors to consider, it is important that you consult an experienced business planning attorney who can understand all of the interests at stake and work with you to protect them.
5 Mistakes to Avoid for Successful Business Succession
It is seen time and time again where 20 to 30 years have passed and a fledgling privately owned business has now grown into a major asset without any plan for succession. Whether your business is just starting to be successful or is firmly established it is best to avoid the following mistakes to ensure:
- There is a smooth transition for the business after your permanent disability or death
- That your family is taken care of
- That the federal and state governments do not take up to one-half of your wealth.
Delaying to Plan
Many people put succession planning off because they think they do not have time, think their business is too small, do not want to contemplate their own death or disability, or want to postpone final decisions on division of their assets as it may make a current relationship awkward. It is important to plan early to give you time to contemplate who the successor should be, and to allow enough time to set the plan in motion.
Choosing the Wrong Successor
It is important to choose the right successor to ensure the continued prosperity of your business and the maintenance and security of your family wealth. If you own a building supply chain, and your son has no interest in building supplies or managing a business, or lacks the skills to manage the business, leaving the business to your son is not a smart idea. In this situation, cashing out by selling to management, a competitor or a third party and then leaving your family the security and flexibility of a liquid investment trust may protect the business and avoid a severe loss in value.
Splitting the Company Equally
There is a difference between equal and equitable. Splitting a business equally among all of your children may not be equitable or fair and may wreak havoc on a business. The children directly involved in the business may feel like the disinterested children are riding their coattails. Also, the disinterested children may maliciously use their ownership interest to play out family feuds. It is better to leave control with the children directly involved in the business or give them a chance to purchase the business and gave the disinterested children other assets.
Delay Implementation of the Plan
The best plan in the world means nothing unless it is timely implemented. If you plan to have your children take over, they should be involved in management discussions and be given their own projects to develop their own management ability. Many times a parent micromanages and stifles the child’s growth and wonders why the child is not ready at 40 or 45 years of age. Further, it is important to establish a support network of senior managers to help guide your child or children especially in the event of your disability or early death. The earlier this is done, the better equipped your successors will be to take the reins.
Failing to Provide Liquidity for Taxes
For most privately held business owners, the business is their estate. If you have a business worth $20 million, after applying the Federal Unified Credit, your death tax bill will be approximately $4 million. You need to provide liquidity through life insurance, holding separate liquid assets, or even selling the business to your children or a third party at or prior to death to pay for death taxes or else your family will be forced to sell at an inopportune time to raise funds for such tax.
Avoiding the above mistakes by starting early and being proactive with planning will give you the best chance that your business will continue to be successful through the next generation, your loved ones will be taken care of, and you will minimize your federal and state death taxes.
Contact our Philadelphia Business law firm with your questions, comments or concerns.