Every business needs a succession plan to survive. Yet, one of the essential parts of running a business is succession planning. However, many people believe that estate and succession planning is the same.
Succession planning deals with the business itself. It involves making plans to ensure continuity and smoothness as it progresses from one generation to the other. On the other hand, estate planning has to do with the assets in the estate, like ownership interest in closely helping businesses.
Here are vital questions one need to consider in developing a succession plan:
Can the business survive into the coming generation? If yes, are there members of the family that believe in the business's vision and are willing to join it? How does their vision align with that of the company?
Will selling the business provide liquidity to give financial security in the future?
If the business is not sold, who will take over the operation? Do they have the training and qualification essential to run the business?
A successful business needs to encourage training and preparation for leadership in the organization. One also needs to keep in mind the future business needs.
When planning business succession, it should solidify the continual structure of the business. On the other hand, estate planning allows you to have your wishes for your assets while you are alive, even if you are incapacitated or when dead.
In developing an estate plan, here are important questions a business owner needs to ask.
What are the sources of wealth that the individual has, alongside the potential exposure for the estate?
What’s the individual’s definition of financial security, and how much of their wealth at the moment is below or above the amount?
Do they own any insurance or investment portfolios? Can they serve as liquidity for estate tax liability payment?
What plans do they have for the funeral costs, asset distribution, and the final health care directive? Estate planning can also reduce exposure to estate and further taxes, giving way for professional investment management for you and the oncoming generation.
This reveals why discussions about wealth, ownership, family responsibility alongside critical business persons might be awkward, often bringing up disagreements in the family. A business needs to have a complete and viable succession plan for the estate and business to prevent any severe financial and emotional consequences from affecting your business.
For instance, if the entire family prioritizes estate equalization, the estate and succession plan must be coordinated. For an estate plan that transfers the business to kids directly involved in the industry, the plan needs to account for how the uninvolved kids will have their share of the estate. For estates subjected to estate taxes without a plan for liquidity for tax payment, the uninvolved kids might not have any assets and the kids involved get the business; or they might face an awkward situation of selling the business for tax payment, which spoils the succession plan of the business owner.
If there is no succession plan, the following might follow:
Since there is no leader, the business will have no clear direction
Employees will lose faith in the company’s leadership.
Middle management might have a power struggle
Disagreement in the family, which could make them break apart
Loss in value of the business in the absence of a significant business figure during the sale of the company
Without estate planning, the following might take place:
Costs of probate costs
Tax liability of an unforeseen estate
Asset distribution delay
Possible litigation costs from disagreement among family members
For people that have a business, it is essential to have both planning to manage how you transfer the asset. This will maximize family harmony, which will protect the business's legacy.
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