Succession Planning is an important strategy for public and private businesses. Most family businesses don’t survive past the second generation. Public companies are often criticized for not having an adequate succession plan in place. Just last year, Warren Buffet finally named his successor.

Succession planning for family businesses is a combination of:

  1. Interpersonal considerations with regard to family members.
  2. Retirement and financial considerations for the founder, family members and the business.
  3. Income and estate planning for the family members.

Interpersonal Considerations

The founder has spent many years building up their business. The business becomes another family member for the founder. The founder’s family members working in the business can present many challenges. If there are two families involved in the business, it is further complicated.

The founder, in many instances, is going to hold on to control of the company as long as possible. Warren Buffet is 90 years old and has just last year named his successor.

The founder will have the following concerns:

  1. Can his family members successfully run the business.
  2. Can the business provide for the founder’s retirement.
  3. What is the value of the business.
  4. How do I choose a successor.
  5. When should succession planning begin.

The family members will have the following concerns:

  1. Will they be treated as business associates or as family members by the founder and key employees.
  2. Can the business support their life style.
  3. Are they better off, career-wise, working for someone else before entering the business.

Retirement and Financial Considerations

  1. If the business is going to be transferred to family members, how is the owner going to be compensated.
  2. When should the transfer of ownership begin.
  3. How is the transfer of ownership going to be funded.

Income and Estate Planning

The owner can gift, sell or bonus shares to family members. What are the income and estate planning implications? The business can buy out the owner. What are the tax implications?

If the family is not going to succeed to the business, what is the exit strategy:

  1. Sale to employees
  2. Sale to outsiders
  3. Sale to an employee stock ownership plan (ESOP)

All of the questions raised above will be discussed in our next issue regarding Succession Planning. If you have questions with regard to these matters, consult your advisor at Perlson LLP.

If you are not yet a client, contact Michael Deo, Managing Partner, at (516) 541-0022.

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