How to Avoid a Family Fight over Company
A comprehensive succession plan is a set of legal guidelines to ensure an orderly transfer of financial control and executive responsibilities to a new generation of leaders. Index Fund Advisors’ recent article entitled “How to Avoid a Messy Succession Battle” suggests that you take a multi-prong approach to succession planning.
A business owner must identify the individual who has the skills to run a business. A succession plan can sometimes divide the leadership roles, with one person running the business and another in a senior role overseeing long-term development and planning.
Business owners also must consider their personal estate plans when devising a succession plan. Business owners need to be proactive about estate planning and succession planning. Ask an experienced estate planning attorney about both processes as ongoing strategies. That means you don’t create an estate plan or a succession plan and file it away until you want to retire. Circumstances can change, so you’ll probably periodically need to review it and make sure everything is up-to-date.
When multiple owners are involved, a succession plan should create rules and procedures for other owners who might want to hire friends and relatives for key positions. The company’s founders must consider what happens if an owner gets a divorce, suffers a disability, or declares personal bankruptcy. These types of situations can change the rules within a buy-sell agreement—the master document that details the rules between who gets what and how a company is organized in the future.
A succession plan can also state the rules for issues involving transferring of equity and/or shares of a company to family members. In addition to putting into writing exactly who can be a transferee and the amount of equity they’re allowed, business owners should use the succession planning process to address issues related to voting rights. A succession plan should also specify the financial terms at the time of an owner’s death or sudden exit.
You also want to make the right decisions from a tax perspective. A random agreement established by you or an attorney that doesn’t understand the income tax implications of the agreement is a bad idea. You want to make sure that both the buyer and seller achieve compatable goals tax wise. These goals can often work at cross purposes from one another. For example, the seller that wants to avoid a tax on ordinary income, and who would rather have income classified as captial gains, may be working with a buyer who wants his purchase deductible more quickly by allocating more of the purchase price to inventory (deductible as a cost against ordinary income).
While avoiding such a decision-making process might appeal to younger executives, delaying these decisions and processes creates more uncertainty in a company’s ongoing success.
Whatever the size of a business, any business owner needs to create a succession plan sooner rather than later. If you don’t, you may leave a mess for the next generation of owners and employees.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
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Reference: Index Fund Advisors (Nov. 22, 2021) “How to Avoid a Messy Succession Battle”