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3 Important Suggestions about Business Succession Planning

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Business Succession Planning: Three Suggestions and Why the Biggest Threats May Be Connected to Your CPAs

If you intend to pass your business on to the next generation, developing a business succession plan should be top of mind when considering the future of your company. Eventually, you will want (or need) to retire, but rather than waiting until that time comes to decide what will happen to your business, it is prudent to develop a succession plan early on.

And it’s even more prudent to treat business succession as the tip of a planning and wealth management iceberg. There’s a huge array of issues lurking below the surface and a need to review how your CPAs are steering the ship.

Business Succession 

When it comes to family businesses, succession planning can be complicated, primarily because of the emotions and close-knit relationships involved. 

Some children (or children’s spouses) may be interested in taking over while others aren’t, and some of those interested in taking over may not be a great fit. Key non-family management personnel also may need to be retained and further incentivized.

Many people are uncomfortable when it comes to discussing topics involving death and finances, but in order to set yourself and your family up for an effective succession, here are three basic tips.

 #1: It’s Never Too Early to Begin Planning

While five years prior to your succession is a good time to start planning, ten years prior is even better to begin implementing details that may be involved. You may have been advised to build an exit strategy directly into your business plan, which is beneficial in the long run. The greater the amount of time you are able to spend on succession planning, the smoother the transition process will likely be.

 #2: Involve Family Members 

Creating a succession plan quietly on your own (and then "announcing" it to all those who will be affected) can be a recipe for disaster when it comes to a family business. Instead, you’ll want to get your family members involved early on so that you can discuss and strategize together. This will also give your loved ones time to decide if they do want to be involved directly, or if they would rather pursue other interests. 

You may also discover during this time that some family members are passionate about certain components of the business, while others are most capable of handling other aspects. 

Most importantly, by involving your family members, you may come to realize that a succession plan that keeps the business in the family is might not be the best decision after all, and that. Ultimately, it may be best to sell.  

Communication is key to creating and implementing a plan that will help your business thrive while keeping your family dynamic strong.   

#3 Train Your Successors

You’re more likely to achieve success with your transition plan by working with your successors for an ample amount of time before you hand over full responsibility. Beyond the day-to-day, also consider involving your successors in strategic planning and decision-making five or ten years out. While it may be difficult to give up some control while you are still very much "in charge," allowing your successors to be a key part of strategic initiatives will greatly improve their ability to continue to handle this after your exit. 

Comprehensive Planning, Risks, and the CPA Practice Model

Succession planning, like every other important part of a business owner’s financial life, is hugely dependent on the quality of the process.

Business owners often look to their CPA for the kind of comprehensive planning that could help them keep as much money as possible. The CPA focuses on taxes, the foundation of keeping money.

With a central view of all their assets and financial activities, the CPA is uniquely suited to play the role of a trusted advisor when it comes to providing that planning.

Successful business owners, because of their success, regularly break through to the next level. With each level of success, a business owner faces new challenges:

i.    Growing income tax and other tax liabilities;

ii.    Bigger, more complex estates to protect;

iii.    Personal and business balance sheets with larger and more complex assets and liabilities;

iv.    Growing numbers of key employees to lead, nurture, and incentivize, and more responsibilities generally. 

All this adds up to continually new business issues, which require fresh planning and expertise. These successes bring many new tax problems to solve.

First, there’s federal tax law – statutes, case law, regulations – tens of thousands of pages, and that’s before considering the fifty states and separate laws like ERISA. Or the fact that tax law and related laws are subject to change every year by politicians, regulators, and courts.

Succession is tied into issues like business owners' wealth often being concentrated in the companies they've built. Succession gets tied up in estate taxes, capital gains exposure, real estate holdings of the business – even compensation plans.

CPAs frequently are slammed for time. Tax filing deadlines and compliance work are constant. Time to reflect and strategize?  Time to be proactive? Not so much.

Clients like successful business owners who have complicated circumstances and need forward-looking strategies may not get them.

Business succession is only one complicated component among many complicated components. The kind of planning needed requires navigating through a galaxy of complex and moving parts. 

A business owner who understands this is way ahead of the game. 

No single CPA firm could master and stay on top of even a significant fraction, let alone all, of tax law and related legislation; the time required of a CPA – or any individual – would be too great.

Fortunately, there are experts out there who specialize in tax law and other technical niches highly relevant to successful business owners – specialists with expertise that’s an inch wide and a mile deep. It’s also possible to find advisory firms possessing expertise about those experts – who have established collaborative relationships with them, in order to build customized teams of experts on behalf of clients.

So what’s lurking beneath a challenging, risky issue like succession planning is the necessity of a customized team-based process. Creating a customized process that requires the collaboration of experts means a process that specializes in your complexity.

When you’re working with your CPAs and financial advisors, seriously consider exploring a team-of-experts approach. Optimal succession planning and a whole lot more depend on it.

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