One of our key areas of focus [at Wilkins Insurance Group] is working with privately held family businesses in the area of succession/transition planning. Seeing that family businesses make up 50% of our gross domestic product, it is vital that these companies successfully transition to the next generation. Therein lies the problem: the senior generation is often uncertain if the next generation has the experience and ability to carry the company torch on their own.

Uncertainty about whether younger family members can run the company is the leading concern that family businesses have about keeping management in the hands of one or more family members. The good news is that these issues can be overcome with some careful forethought and planning in the following areas:

  1. Development of Future Leaders – This group doesn’t necessarily need to be family. The key is for the senior generation to mentor the next generation and begin this process early.
  2. Governance – Determining who has control amongst the ownership group is vital. The typical dynamic a family business faces is between working and non-working family, as well as integrating unrelated key people into the control mix. There are solutions like voting and non-voting stock, voting trusts and others.
  3. Transfer Planning – The senior generation should transfer ownership in the business over time to avoid a large estate tax bill at death, potentially placing a large financial burden on the business. These transfers to the next generation can be non-voting interests, leaving the senior generation with an element of control.
  4. Asset Protection – It is critical to protect the business interests from liabilities created from within the company as well as those outside the company created by the owner’s personal liabilities.

All business transitions need to be well thought out with an organized plan. The following steps will help frame this process:

5 Steps for a Successful Business Transition

List goals and objectives

  • Review existing succession plan.
  • Develop visions, goals, and objectives for the business.
  • Determine the importance of continued family involvement in leadership and ownership of the company, while considering the option to bring in professional management.
  • Establish retirement goals and cash flow needs of retiring family owners.
  • *Identify goals of next generation management.
  • Identify and retain a team of professional advisors.

Establish a Governance Process

  • Document the succession plan and share it with the owners and key management.
  • Have a plan laid out for dispute resolution.

Establish a Succession Plan

  • Identify the successor generation be it family or non-family.
  • Create the roles for active and non-active family members.

Establish a Business Estate Plan that Coordinates with Senior Generation’s Personal Estate Plan

  • Review tax implications to the owner and the business upon a sale/transfer of stock, divorce, death, etc.
  • Make sure buy/sell is using an up to date valuation and minimizes taxes.

Create a Transition Plan

  • Outright purchase, gift/bequest, or a combination of these.
  • If the business is to be purchased, consider financing options from an external party or self-financed from the retiring owners.
  • Establish a timeline for implementation of the succession plan.

Once these 5 steps are worked through, the transition planning begins to take shape.