It is never too early to start thinking about Business Succession Planning. All business owners eventually reach a point where they want to retire, they want to slow down, want to try their hand at something new, want to give the younger generation a chance to show their stuff, or want to cash out. In every case, it is a smoother and generally more profitable transition if the owners have taken the time to plan and think through what is required to successfully transition their business.
Succession planning may involve the sale of the business. But to whom? To employees? To family? To suppliers? To customers? To competitors? And for how much? Is there a reasonable methodology for setting the value of the business? Succession planning may involve gifts to spouses, children, and grandchildren. But are they competent to run the business? Is the management staff competent and loyal enough to work with inexperienced family members while they come up to speed? Succession planning may involve stock options or deferred compensation or other bonus arrangements for key employees designed to keep them on board after the owners have moved on. Do you have a group of employees who have the experience and skill to run the business after you are gone? Have you given them the ownership and/or compensation incentives needed to win their loyalty and keep them on board?
Succession planning may involve employee stock ownership plans (“ESOPs”). By using an ESOP vehicle, business owners may be able to create a market for their stock where no market otherwise exists, and may be able to sell their stock to such ESOP in a tax-advantaged way. But ESOPs are somewhat complicated and costly to set up and maintain. You must consider whether the possible upfront tax savings are worth the cost and administrative complexities inherent in such arrangements.
There are many other issues related to succession planning that need to be considered, including valuation of the company stock, use of valuation discounts, use of stock redemption or buy-sell agreements, use of employee non-compete agreements, and training of future management. The team at Pickrel, Schaeffer & Ebeling have worked with countless businesses throughout the area, from initial start-up, articles of incorporation, employment and employee issues, through to business succession planning.