As advocates for a process-oriented approach to succession planning in a family owned business, we feel that owners, and a careful examination of their goals, are most important. The views and concerns of departing owners will have, perhaps, the most profound impact on the process.
While clarifying the current owner’s attitudes toward ownership succession sets the stage, determining who will actually operate the business and guide its success into the future is an equally important part of the process.
Can efficient and effective management of the enterprise be accomplished with talented family members? Should management, instead, be left to key employees? Or, will it be necessary to look beyond family and current employees to find the talent necessary for the business to thrive?
Understanding, defining and filling the various roles and responsibilities of the individuals upon whom the future success of the business depends are critically important.
Understand the skill set being replaced
Before we can reach a conclusion regarding the future generation of business management, it is first necessary to thoroughly understand the skill set that is being replaced. To begin, ask the following questions:• Is the departing owner responsible for the strategic direction of the business?
• Does he or she serve important roles in financial and administrative management, operations, or sales and marketing?
• Are there special relationships with customers, clients, vendors, suppliers, government or regulatory officials, community leaders, or a board of directors or advisors that must be transitioned?
In reality, it may take several individuals to replace the skill sets that have developed or evolved over the years and that will essentially be lost by the retirement of senior leadership.
Access strengths, weaknesses of potential replacements
The fact that they are better positioned to choose successors more objectively is one of the greatest luxuries those charged with transitioning business management outside of the closely-held or family-owned business context enjoy.
Their focus is based almost entirely on finding individuals who possess the desired skill sets. In the closely-held or family-business context, however, many of the candidates are considered almost by default because of kinship or a history of employment. For the good of the business, however, it is still necessary to assess the skills and weaknesses of any potential replacement.
And beyond skills, particularly in the case of family members, it is important to consider other factors such as:
• How will the successor view his or her relationship to the business?
• Is he or she a steward or an entrepreneur?
• Does the successor possess appropriate communication skills and a suitable leadership style?
• Will it be necessary to educate or train the intended successor to compensate for perceived deficiencies?
• Will it be necessary to develop and rely upon the skills of other members of the management team to supplement the efforts of a family owner/operator?
• If multiple family members are to be involved in the operation of the business, has the impact of sibling rivalry and nepotism been adequately addressed?
On the other hand, if key employees are essential to the success of the business, an entirely different set of issues may be considered, particularly if they will not be offered an ownership stake. Of course, it is still important to develop these key employees so that they will succeed in their respective roles.
To alleviate any perceived concern over their status outside of the controlling family, it is important that the necessary business organization, structure, and processes are in place to support the activities of the key employees. Developing appropriate compensation and benefit structures to attract, reward, and retain important contributors to the success of the business is also paramount.
And, perhaps most important, the key employees must be vested with adequate authority to complement their responsibility. Clear lines of authority must be supported by the remaining family members to support and sustain the success of the transition.
Finally, and unequivocally, we stress that the needs of the business must come first when considering the issue of management succession. It may be necessary to look beyond family members and employees to find the next generation of management. The decision to do so may be difficult, but in the long run, may be necessary to protect the interest of all stakeholders.
Estate, gift tax laws are very likely to change soon
There are several formal proposed bills that would make changes to the current estate and gift tax system. While it is our hope that these proposed laws will not be enacted, it seems best to “plan for the worst and hope for the best,” given the unpredictable political climate and the possible changes that may be made if watered-down versions of these potent proposed laws pass.
The good news is that the reduction of the estate tax exemption amount from $11,700,000 to $3,500,000 would not occur until January 1, 2022. The same timing applies for the proposed reduction of the gift tax allowance to only $1 million, which means that people will not be able to gift more than $1 million after 2021 without paying gift tax.
Also, the proposed increase in the estate tax rate to 45% once a deceased person’s taxable estate exceeds $3.5 million, and 50% and higher when the amount subject to tax exceeds $10 million, will not apply until 2022. In addition to the above exemption and tax changes, gifting of up to $15,000 per year per person will be limited to $30,000 per donor per year for gifts to irrevocable trusts or of interests in certain “flow through entities” beginning in 2022.
This is an important call to action for families having assets expected to exceed $3,500,000 per person to take a serious look at your present planning situation to determine whether to take immediate steps to avoid death taxes.