If you have built or continued a family business, succession planning should be part of the business plan.
Jarod Schoonmaker, owner of CNY Capital Corporation, a private equity company in Syracuse, said that he has observed companies “where the dad built an empire and the kids squander the money.” For him, an exit plan prevents situations like that. “Even with a start-up, you need to know your long-term goal and exit plan,” he said.
That may include selling the business to heirs, employees or outsiders to help fund retirement or support a charity; giving the company to heirs; or selling shares of the company to heirs or employees.
Not planning can pass along a mess to the surviving family. It can also mean chaos if you become temporarily incapacitated. For many business owners, succession planning means their legacy will live on after them.
Unfortunately, many wait too long to plan, according to Jeffrey Scheer, partner at Bond, Schoeneck & King PLLC, in Syracuse.
“You should be thinking about succession planning five years before you think you should start thinking about it,” Scheer said. “Otherwise, you may not be able to position the business to achieve the greatest value for it.”
Waiting too long can mean for some that they become burned out in the work and business slacks off. As the company spirals downward, they have fewer clients, less money and less means to improve the business. Planning earlier can prevent this because those taking over will have the opportunity to infuse the business with their energy and ideas to keep it operating.
Planning also enables you to take advantage of taxing and gifting strategies that can save you money.
“If people wait too long, there may not be enough time to plan effectively because you have to do it fast to leverage state tax advantages,” Scheer said.
It also allows you time to clean up what Scheer calls “blemishes” on the business — like old receivables, judgments and obligations.
Starting earlier can also help get family members more interested in the business.
“The next generation won’t want to come in at 45 or 50 years old,” Scheer said. “If Mom and Dad say they want to hold on forever, you won’t have an effective succession plan. Sometimes Mom and Dad say Junior isn’t ready. But I ask them, ‘Were you ready when you started or when your parents passed it on to you? Maybe it’s time to give Junior the same opportunity.’”
The business may need tweaking to carry on, such as a 100-cow dairy may not be large enough to support the two families who want to take over and the parents who own farm and they will need to scale up to 1,000 cows.
If one heir has worked at the business and the other hasn’t, you should consider the value of the sweat equity of the working heir. “Fair” is not always “equal.”
Carol Crossett, partner at Tully Rinckey, PLLC, in Syracuse, walks clients through questions on their goals for succession, any planning documents they may have, any legal documents related to the business, and more.
“Financial statements could be important for the gross profit revenue, business valuation, and what assets are part of the business and what entities hold them,” she said.
Gathering all this information takes time, a fact that she said surprises many clients planning succession. But planning sooner is better than scrambling during a crisis to figure out how to carry on the family business.
A franchise-based business often has to ensure that the successor has the proper credentials and sufficient assets to take over the business. It is not as simple as signing a few papers and handing over the keys.
“Even ones that require just a notice and application, and that they have enough capital, there’s also normally a new agreement once it passes on,” Crossett said. “Those are situations where it’s more involved.”
She added that it can take a few meetings to iron out all the details.
The US Small Business Administration offers services to help with business planning, including succession and short-term emergency circumstances.
“How can they keep the business viable until that key person is able to come back?” said Daniel Rickman, deputy district director for the U.S. Small Business Administration in the Syracuse district office.
This can include documenting and training on vital business systems and procedures—not just the actual work that makes the money. Keys, passwords, entry codes and contact information for vital vendors and clients are all part of planning for short-term emergencies. Who will handle different roles? To whom will they report?
“What you might find is you haven’t prepared for that transition,” he said. “You have to plan financially and for the operation of the business. The sooner you start planning, the better.”
After some preliminary planning, Rickman advises making it official through an attorney.
The SBA offers educational programming to help learn business administration, which can augment a succession plan. The SBA also offers loans frequently used for changes of ownership.
“For typical main street businesses, one that’s successfully transitioned is stronger and healthier,” Rickman said. “The potential for long-term success for the new owners is greater when there’s a good plan executed properly.”