Creating a Legacy of Continuity and Success

    By: Ursula Scroggs & Jean Stenger

    We’ve all seen the statistics about closely-held family businesses, basically concluding that only approximately 30% of family businesses will pass from the first generation of owners to the second, approximately 10% from the second to the third, and less than 5% to the fourth and beyond.

    More than 45% of family business owners expecting to retire in five years DO NOT have a succession plan. Why is this the case?

    Arguably, business owners’ greatest concentration of capital (financial and emotional) is in their business. And that business generally occupies the lion’s share of his or her time. What stops this so-very-important planning for the future? We’ll call it “decide-a-phobia.” Inertia. Unwillingness to face some of the emotionally charged issues that face family business owners.

    A Call to Action
    If you haven’t tackled the difficult, yet rewarding, task of assuring your business’ legacy and future success, now is the time. Beyond the fact that there is an expectation that estate taxes are going to rise (, you and your business do not want to become another one of those glum statistics.

    Overcome the inertia. Developing, documenting and communicating a plan that culminates with the orderly transition of your business necessitates dealing with both the hard (technical) issues, as well as the soft (emotional) issues. Minimally, an effective business transition/succession planning process should include:
    • Engaging appropriate professional advisors
    • Strategic planning
    • Identifying issues/opportunities
    • Exploring options
    • Developing, implementing and monitoring plans

    The Ultimate Goals?
    We fully believe that the fundamental goals of all transition and succession planning should include:
    • Ownership succession
    • Management succession
    • Financial security
    • Tax efficiency
    • Family harmony

    Where do we start?
    The answer is simple — the process must begin with the senior generation of owners and operators who currently control the business. Whether a single individual or a group of owners, the senior generation must start by facing the issues that will be important in defining the ultimate goals.

    It’s important to start by clarifying the current owner(s)’ attitudes toward ownership succession. Whether the senior generation of owners built the business from the ground up, succeeded a prior generation of owners, or purchased the business from third parties, one of the greatest challenges will be who will assume the role of owner after their retirement? Unfortunately, there is no easily replicable formula that may be employed to assist the senior generation in answering that challenge because the critical factors in achieving success will vary greatly from business to business.

    However, any owner or group of owners can begin by look at a series of questions designed to elicit the answers they believe necessary in setting the parameters for the next generation of owners. Though not exhaustive, some of the questions might include the following:
    • Who should be included in our next generation of owners?
    • Should the next generation of owners be limited to family members?
    • Should key employees be considered for share ownership?
    • Is there a means to treat family members fairly without granting share ownership?
    • Is ownership a birth-right? Is kinship the sole prerequisite for share ownership?
    • If ownership is a birth-right, how does one distinguish between differing levels of contribution to the business?
    • When considering income, earnings and the complexity of the business, are ownership and management necessarily co-dependent?
    • Should a Shareholder’s Agreement be implemented to restrict the subsequent transfer of shares?
    • How should contingencies such as death, disability, divorce, retirement, resignation or termination be addressed?
    • What challenges could be posed by minority shareholders?
    • Should an independent board of directors or advisors or family council be considered?
    • Which professional advisors should be retained to navigate these complex questions?

    Answering these questions in a manner that balances the best interests of the business with deference to family harmony will provide an important first step in the journey to a successful transition.

    Stay tuned!
    We’ll continue our quest to help you assure a legacy of continuity and success by sharing best practices, inspiring and scary stories from local business owners (yes, the good, bad and ugly,) along with technical guidance.

    Ursula Scroggs, CPA, is managing director at DKSS CPAs + Advisors, with offices in Troy and St. Clair Shores, Michigan. Jean Stenger, CPA, is a senior accounting manager with DKSS.