Who Will Run Your Business After You?

Robert HobermanManaging Partner, Hoberman & Lesser CPAs, LLP

If you’re a business owner, do you have a plan in place that names who’ll follow you as head of your company? You may feel you’re too busy running the business today to waste time on long-term plans that seem so distant. But there may be more reasons than you think to make decisions, some of which will benefit you today. A well-thought-out plan will:

  • Allow you to shape the fate of your business
  • Preserve the value of your business during a transition
  • Reduce income and estate taxes
  • Minimize the risk of intra-family discord, when children play a role in your business

Whatever you decide to include in your business succession plan doesn’t need to be cast in stone. But just like a last will and testament, you need to make your future wishes known and still allow for changes during your lifetime. Depending on the particulars, you can modify your plan as circumstances change. The trick is to be careful not to make promises you might not be able to keep. 

Also, similar to creating a will, you don’t have to reveal the full contents of your business plan to all impacted parties immediately, though some plans should be made apparent early on. That’s especially true if you decide you’d like to pass your business to heirs and need to start preparing them for that contingency. 

Define Your Bottom Line

Perhaps the most fundamental question that a succession plan needs to address is: how much value will you need to take out of the company to meet your retirement and estate planning needs? The answer will influence whether you’ll need to sell the company or transition some or all of the ownership to your heirs, assuming you have heirs willing and able to do so. If transitioning ownership is the plan, you can employ technical experts to use tax-efficient strategies, such as gifting, to achieve that goal. 

If you lack suitable heirs, an alternative to selling the company to an outside buyer or an ESOP, or try to facilitate the purchase of the business by your key employees. They can’t be accomplished overnight and typically involves “nonqualified” (limited tax breaks) executive compensation plans, leans, and possibly a “key man” life insurance policy. 

Secure Senior Management

Even if you expect to sell the company to an outside buyer, you could enhance and preserve its value if you downsize your role and transition management responsibility to your senior executives, including an heir-apparent CEO. Assuming the new team is successful, an outside buyer wouldn’t consider your departure as big a risk to the ongoing success of the company or worry about the need to make immediate changes to protect the investment. 

Unless you plan to sell or hand off your business to children soon, it’s crucial to avoid planning solely by looking at the company as it’s structured today. Think instead about how various functions will be performed in the future. 

If your business is too small to accommodate your adult children on the payroll in key positions, perhaps it will then. Keep that in mind as you start to build your succession plan. At the same time, give children enough of an opportunity to receive proper training and demonstrate their capabilities and passions. If they aren’t up for the job, all stakeholders suffer, including your children. 

Similarly, don’t limit your planning to focus exclusively on the future on one solution. Think about the next management tier, and who’ll be filling those slots, and how they can develop the skills and experience to fill them well. Those decisions will be informed not only by looking at your company’s present needs, but the challenges you expect it to face in the future. 

Today is Tomorrow for Your Business

Your succession plan should be a general road map for the future of your business without you, as well as to help inform your decisions about the business today. While it will likely require some precise legal arrangements (such as trusts, employment contracts, life insurance policies and executive compensation plans), don’t let the tail wag the dog. As noted, your succession plan can evolve as circumstances dictate. Having a plan is the goal, but don’t paint yourself into a corner.