Choosing a Successor Part II – Two Key Decisions

In the previous article, we began a discussion on the complicated issue of choosing a successor.

Handing off responsibility for running (and/or owning) the family business is not without its challenges.

This really breaks down to two decisions: who will run the business and who will inherit the business?

In terms of running the business, the owner needs to sort through several issues -” and emotions -” to determine what is really involved. If there are children working in the business, family and emotional considerations are best set aside, as this is an administrative decision about who is best suited to fill the position the owner is leaving. Making this decision on any other grounds could put the business at risk.

There are a number of factors that can help the owner make a reasonable, sound decision.

First, make sure those you see as potential successors see themselves as such. Sometimes, a business owner is surprised to find that his or her best “first mate” has no interest in becoming captain.

Second, make sure to test a potential successor’s abilities with additional responsibilities. The key question: how do they handle those new roles? In doing so, the owner gets to see who is best suited for leadership.

Finally, remember that every ship needs a crew. Even if talented family members or other employees are not selected to lead, there are important roles to fill: as corporate officers, regional or department managers, or heads of special projects.

Who Will Inherit the Business?
Because the successor will have a great deal of responsibility for the operation of the business, there is often an expectation that ownership will be part of the deal. But passing on ownership is a very different issue than passing on operational responsibility, particularly related to the current owner’s concern for retirement, and the financial security of a spouse.

One option is for the owner to retain ownership of the business stock until death, at which time it would pass to the spouse, who would then either pass it to the children, or sell it to a non-family successor. The downside: this could mean a very long wait for a successor to enjoy the fruits of ownership. In addition, the income of the owner and spouse may be too dependent on the successor; if the business hits a slump, financial security could be threatened.

Leaving the stock to working children, either during their lifetime (by gifting or sale) or at death (though a will), can also be a concern, given that the owner and spouse may find their income compromised under either scenario.

Selling the stock to a successor (family member or otherwise) could provide a solution in that it would give the owner and spouse liquid assets in exchange for the stock. On the other hand, the successor may have trouble coming up with the money required to carry out the purchase.

In some ways, the details of ownership of the business are more difficult than determining a successor. A host of financial concerns arise, from retirement income and financial security for owner and spouse, to economic security for successors, to the fiscal strength of the company itself.

Fortunately, there are creative and effective strategies available to address these situations. As is usually the case, planning ahead is key. A good exit strategy consultant can guide you, your family and your business to a successful transition.

Norman Pappas is president and founder of Pappas Financial and the author of several articles on business and estate planning topics. His book, Passing the Bucks, is a guide to business succession and wealth transfer planning. He can be reached at [email protected].