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You’ve Worked Hard, Built your Business, Now What? Time to Start Succession Planning!
Succession planning can seem like a daunting task – one that we’d all prefer to wait on, but the benefits and peace of mind from getting a proper plan in place sooner rather than later can far outweigh the costs. With that in mind, let’s jump into the benefits of considering a succession plan:
Save On Taxes
Every dollar the government does not take is another dollar for you and your family. That is why proper tax planning is a big reason – possibly the biggest reason – a succession plan is always a good idea. A well structured plan could save you and your family hundreds of thousands of dollars in taxes. Those kinds of savings make a succession plan well worth the costs!
Honest Family Discussion
One of the most important (and often difficult!) tasks in succession planning is starting an honest family discussion about the future of the business. But it doesn’t have to be. It’s a common expectation that the next generation will take over the family farm, and we find that our clients usually have a specific child or children in mind; however, one or more of those children occasionally have other things in mind.
I have yet to see a scenario where no one from the next generation is interested in taking over, but it’s not always the one we expect. Sometimes, the person you think wants to take over may not truly have that desire, and someone you may have previously overlooked expresses the keen interest needed to push a business forward.
This is why I always encourage my clients to start the process with a family meeting, wherein everyone goes in with an open mind. Someone might just end up surprising and impressing you once the discussions get going.
Of course, it’s also possible that your initial expectations will be confirmed.
Either way, you can proceed forward with the peace of mind knowing you are on the right track, and that you are doing the best thing for your family.
Transition Control in a Structured Manner
Once everyone has agreed who will take over the business, the question then becomes: “How?”
An ideal aspect of a succession plan is the GRADUAL transfer of control. No matter how much training and experience your children have in the industry, or even your business, there is no substitute for the experience of actually running a business. You either have it, or you don’t.
This can create a scary risk with transferring the business to the next generation!
Thankfully, a proper succession plan can provide for a slow and structured transfer of control, which can also be tied to a slow and structured transfer of ownership.
Through the use of “share freezes”, your voting-equity shares can be “frozen” into redeemable, fixed-value voting special shares. Your successors can then purchase new equity shares that allow them to share in the future growth of the business, while you maintain voting control. As your successors grow the business, they can redeem your shares (ie. buy you out) over time, thereby increasing their ownership of the company and slowing transferring voting control over to the next generation.
Access Wealth
This leads us into another big reason to consider a succession plan. While you likely want to provide for your family’s future and ensure the continued success of your business, you also deserve to enjoy the rewards of your efforts. A proper succession plan will provide for all of these things.
Final Thoughts
Every succession plan is unique. There is no one size fits all plan that will work for everyone, but there is a plan that will work perfectly for you. Very rarely do we accidentally stumble into the perfect plan – especially when taxes are involved! That’s where good financial and legal advisors come in. Let us help figure out a plan, so that the next generation can worry about the business, and you can worry about what’s really important, enjoying your future.
This article was written by Business, Agri-Business, and Succession Planning Lawyer Todd Devitt, and was originally written for and published by Country Guide in their July 2022 issue.
