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Future tense

Preparing a business succession plan

the futureby Roman Bai and Marcus Renwick

What is the most severe threat to the existence of your business? Some may answer “my competition,” or “income and estate taxes.” Even others would answer, “rising costs.” While these are good answers and are concerns in day to day business operations, there is one issue that overrides everything else regarding threats to your business. The number one threat to your continued going concern is quite simply the lack of a Business Succession Plan.

The fact of the matter is that, as humans, our existence is finite. Companies, on the other hand, do not suffer the same consequence of being an organic being. Their existence is potentially infinite. While competition, taxes and increased costs can weigh on a business, the most severe detriment to a business is the loss of an owner or key employee. With a Business Succession Plan, a loss of a key person will trigger specific actions so that the business can continue its operations.

Most business owners do not understand the problems that not having a Business Succession Plan will create, nor do they understand the solution to the problem or how an actual plan is created. The purpose of this article is to outline the problem, the solution, and to explain to the business owner how exactly our office crafts a Business Succession Plan.

The Problem
Recent research reveals some startling truths:

  • Most closely-held businesses are owned by one shareholder.
  • A majority of businesses do not have a full and active Business Succession Plan in place.
  • Fewer than half have a successor in line and prepared.
  • More than half of business owners in the United States are 55 years of age or older.
  • A good percentage of the owners are 65 years of age or older.

What does this say about the condition of private American businesses? What does this say about the position of business families? Without succession planning, it is a near certainty a great portion of the business value will be lost if the “leader” passes away without a Business Succession Plan. Thousands or millions of dollars which could have been reinvested, saved or enjoyed otherwise are lost in an instant. Furthermore, failure to implement a Business Succession Plan can result in unnecessary estate taxes.

The Solution
It is critical to understand that a Business Succession Plan will take time to implement. It is not a day long or hour long process consisting of writing a will or settled with
a handshake. A number of steps (described below) must be completed in order to receive the maximum value for a business and make the transition as smooth as possible. Also, there are many factors to consider when creating a Business Succession Plan. The age and health of the owner, the industry, the economy and children’s interests and ages are just a few factors that must be considered.

The procedures include knowing what business succession is, examining who the potential heirs or buyers are, valuing the company, creating the ideal scenario in which to transfer the business, creating the appropriate legal documents, developing a strategy to deal with estate taxes and establishing a retirement program for the owner. Specifically, following is the procedure that our office, The Center for Financial, Legal & Tax Planning Inc., follows in creating a Business Succession Plan for owners of privately held companies all over the United States.

1. The first step is for you to make sure that we have a complete understanding of the financial status of the business as well as your personal financial status.

a. We request that you send us copies of your most recent financial statements and the past three years of your personal and business tax returns.

2. Our office then reviews that information (at no cost to you). This process usually takes us about one week.

3. We then have a phone call with you (up to approximately one hour in duration) and discuss the results of our review of the information as well as the details of what we expect to accomplish. Again, there is no cost to you for this phone call.

4. Shortly after that discussion, we will send you a detailed itemization of the proposed project complete with our Engagement Contract, an estimated fee structure for the project, a requested retainer amount, and any other documentation we feel is appropriate for you to review prior to you engaging our firm.

5. After we receive the signed contract and retainer, we like to make our first of at least two on-site visits to your location. This date is usually scheduled within four to six weeks.

6. At the first onsite visit – we assist you in gathering and reviewing the information that we have requested in order to successfully complete the Business Succession Plan, and then we set the date for the second on-site visit.

7. We then complete a draft of the written Business Succession Plan and typically we also are completing a draft of the Valuation of your business during this time. This takes approximately four to six weeks after we have completed the first on-site visit.

8. The second onsite visit then takes place, and the now written Business Succession Plan (and the Valuation if conducted) are reviewed. During this review, we agree on the parts of the plan that you are ready to move forward on and we set the date for the final on-site visit.

9. We then complete the final edits to the Business Succession Plan (and Valuation if conducted), draft all of the necessary closing documents, then the final onsite visit takes place to review the final Business Succession Plan (and Valuation if conducted) and execute all of the necessary closing documents.

Convincing the business owner that the biggest threat to a business is that person’s own mortality is tough. To many, the day–to-day challenges are enough to pull their boat asunder. Having a business succession or exit plan is critical to retirement, the succession of the business and the continued financial well-being of the owner. If you are in business, YOU NEED a Business Succession Plan and following the steps above will ensure your success in creating one.

Contact the Center for Financial, Legal & Tax Planning at (618) 997-3436 to learn more.

This article originally appeared in the July/August 2015 issue of Industrial Supplymagazine. Copyright 2015, Direct Business Media.


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