Family Planning: A Rough Guide to Business Succession

Succession planning isn't easy, but it is necessary. Start early and talk frequently, and you'll have an advantage. Here are some pointers and resources to learn more.

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Talk

The generations should communicate candidly and frequently. What do the children want to do in the business? How much ownership do they expect? When does the older generation plan to retire, and how much money will they need to do so? If your family's not good at communication, family business counselors can help.

And start early. Herb Daroff of Baystate Financial Services in Boston had a 65-year-old client who wanted to begin a succession plan, but his 95-year-old father still owned two-thirds of the company. "I guess he was just waiting until the kid was ready," Daroff says.

Resources:

• Family Firm Institute www.ffi.org
• Family Business Institute www.familybusinessinstitute.com

Write

Put the plan for the stock transfer and the management succession in a formal document. Consult the generations involved and senior management, and let everyone know what to expect. "Avoid surprises," says Myra Salzer of the Wealth Conservancy in Boulder, Colorado. Consider assembling an outside board, if you haven't already done so. According to Leon Danco of the Center for Family Business in Cleveland, "the board can serve as a surrogate parent, guiding the management of the company and acting as mediator, reconciler, cautioner, and supporter."

Resources:

• "How to Assemble a Board of Directors," www.inc.com/magazine/20041001/how-to-
  assemble-directors.html
• "Six Steps to Building an Effective Board," www.inc.com/resources/inc500/2007/
  articles/20070401/evans.html

Hire

Bring on a business valuation firm. Even if you're passing on the business as a gift, the IRS will want to know its fair value for tax purposes. Then get an estate-planning lawyer, a financial adviser, and an accountant.

Resources:

• "The Ultimate Valuation Guide," www.inc.com/valuation
• "What Is Your Company Worth Now?" www.inc.com/magazine/20040801/
  valuations_index.html

Ask

There are a lot of financial and legal strategies for passing on a business. Some factors to consider: how involved the senior generation wants to be, who's going to run the business when the senior generation's gone, who's going to own it, and how much value the senior generation wants from the business (some want to get the full amount of cash from it, while others want to pass it to their kids as cheaply as possible).

We'll toss out the major strategies here so you can ask your advisers about them. They're complicated, so involve your attorney and financial adviser from day one.

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