A succession plan should take into account many factors, including: the age and health of the owner; the expected rate of growth of the business; and the ages, abilities, and interests of the owner’s spouse and children. The plan should look at ways and means of designating the owner’s successor. One important factor in choosing a candidate will be on-the-job training and experience. Outside job experience and academic achievement are also important. In addition, the question of compensation or other distributions to family members will probably arise during the opening stages of the family discussion. A conference attended by all involved should provide guidelines, but the owner’s views will take precedence. In addition, such plans should be subject to modification as changes and developments take place within the business and family.
Succession planning may also include stock transfers, which will involve considerations regarding income, estate, and gift taxes. Gift taxes may be reduced through use of the unified credit and annual exclusion. Stock options may be used to reduce income taxes. However, extreme care and planning are required to avoid having stock transfers drawn back into the estate of the business owner. Family members should also discuss the structuring of a buy-sell agreement, entity agreement, or cross-purchase agreement funded by life insurance. If an unfunded plan is put into effect, the family owners who intend to buy the owner’s interests may not have the cash or the borrowing ability at the owner’s death.
Crucial to the ultimate outcome of a succession strategy is the development of a business plan that analyzes the immediate, intermediate, and long-term goals of the business. The plan should be based on financial forecasts and budgets that are adaptable to changing conditions and should be checked against actual results. Of course, the business succession plan should be developed in consultation with the appropriate legal and financial professionals.
Consideration should also be given to the inclusion of non-family members on the board of directors to bring new ideas to the business. They may also be able to help mediate family disputes that may develop within or about the business. Ultimately, what is best for the success of the business, the needs of the family, and the wishes of the owner should result in a plan that moves all parties forward toward healthy future growth and accord.