Advice on Creating Effective Business Succession Plan

Planning for your family business in anticipation of your death, disability or retirement can be tumultuous. Should the business continue? Should it be sold? Or liquidated now when you’re still alive? Can anyone else really run your business?

Such questions cannot be answered easily. But formulating a clear business succession plan can ease your fears and enable you to avoid future financial problems for your business and family.

According to Keith Fevurly, an academic associate at the College for Financial Planning in Denver, effective business succession planning is an art, not a science.

Fevurly says the planner must set objectives, consider the personal characteristics of the chosen successor, place an appropriate value on the business and determine the most expedient means of transferring ownership and control. And this, Fevurly says, must usually be accomplished in an environment of constantly changing economic and tax incentives.

Still, as the business owner, you are in control. You can decide whether the business should be continued by family members, whether it should be liquidated, or sold to outsiders. And if the business is to be kept in the family, you also can decide whether to transfer ownership and management during your lifetime or after your death.

According to Fevurly, reasons to continue your business may include:

* The economic climate may indicate that it’s not a good time to sell the business.

* Increasing profits are likely.

* One or more relatives are active in the business or there are employees who are good choices to take over and successfully manage the company.

Detach yourself emotionally while considering reasons for selling the business:

* The offer may be too good to resist.

* Future prospects of the company don’t look good without your involvement.

* There is no family member or employee to take over the management of the company.

* Sale of the business will provide financial security for you and your family.

Whether the decision is made to continue or sell, Fevurly says a value for the business will have to be determined, which, for a closely held or family business, is likely to prove elusive. But there are established methods available to be used in computing the value of a business, including:

* Comparable price method--comparing underlying assets of the business.

* Asset or “book value” method--computing underlying assets of the business.

* Capitalized earnings or income method approach--looking at the business’s earnings and the likelihood of those earnings continuing.

If you decide to continue your business and you have set the value, you must determine how you will ultimately transfer ownership. The basic tools of transferal include wills, trust arrangements, sales and gifts of partial interests, employee stock ownership plans, incorporation and recapitalization, or the buy-sell agreement.