Getting an early start helps prepare for the unexpected.

Separating business from family is “impossible,” says Jeremy Samatas, owner of family-run The Lucky Monk in South Barrington, Illinois.

Samatas inherited, through a succession plan, one-seventh of his grandfather’s business (which included one restaurant, several hotels, retail operations, and some senior care facilities) in 2004. The remainder of the business was split between his siblings and cousins.

And now, at 36, recognizing the work that’s involved, Samatas feels his family has left succession planning until too late.

While members of the generation between the owners and the deceased grandfather (the parents) still operate the business, they now want to pull back and pass on the reins.

“The hard conversations with us have been excruciating,” Samatas says. “It’s been hard—going from a family-run business to a more business model—getting away from the family part of it. You can get tripped up because you don’t want to hear hard things from a relative. But, at the same time, when your dad talks to you, you don’t hear a businessman talking, but you hear your dad.”

And Samatas fully expects succession planning to be very difficult.

“I love these people as family members, but it truly has to be business first. It’s going to be an uphill battle.”

Every business, large or small, needs to have a succession plan. The plan will determine in the case of death or retirement (or partial retirement) who will own and run a business.

Emotions nearly always run high during succession planning. These could be the emotions of the person creating the plan, as he or she struggles to do what is best for the business, family members, and employees of the business.

Or it could be the emotions of family members, who receive more or less than they expected.

The reality is that most families will delay setting up a succession plan because they don’t want to rock the boat.

And there’s also the argument that succession plans should be put in place to prepare for the unexpected.

Walter Zweifler, CEO of Zweifler Financial Research, New York City, points out that sudden death or incapacitation can mean all of a person’s debts are due in total and immediately.

It can also mean the automatic offset of any life insurance to be paid to the business (any life insurance that would have been paid to beneficiaries is instead paid to any creditors of the business). And it can lead to strife and contention between survivors inside and outside the family.

Next: An early start


An early start

So the sooner you start, the better.

“The earlier you start planning, you can get your own desires down on paper, and talk with your family, partners, or those individuals important to the plan to see how it matches up,” says Julie K. Phillips, small business attorney, Worley Law, LLC, Westerville, Ohio.

It can take anywhere from four months to more than a year to create a succession plan, adds Caroline Worley, the company’s founder, but it’s not just about having sufficient time.

“I like starting ahead of time so families can accept, communicate, and find a role for anyone who’s interested,” she explains.

And while earlier is almost always better, it’s also important to go about succession planning in the right way.

Before you begin, it’s a good idea to have an objective professional involved, in the form of an attorney. “This person can provide an outline of the issues and how to handle them,” Worley says. “A lot of times people don’t understand what some of the options are or what they should be considering.”

And Phillips says, “The ideal time to go [to an attorney] is when you have considered what you want for your business, your retirement, and what you would like to give for your heirs’ inheritance, and possibly discussed this with your spouse and/or your business partner, if you have one.”

After that, it’s a good idea to approach succession planning in this order:

1. Establish one decision-making authority, Worley says. This is typically the head of the family, who “will encourage discussion, foster cooperation, and solicit feedback,” she explains.

Having one person to make final decisions might not make everyone happy, she adds, “but if their voices are heard and a respected family member is the arbiter, disagreements and dissent are mitigated.”

2. Establish some communication ground rules. Should initial discussions among family members be handled in individual conversations or a group talks. Worley suggests the head of the family or the person running the business sit people down one-on-one because they’ll be more open and honest.

“I do think there’s a place for the group discussions, but maybe it’s after the individual talks,” she says. The company head should ask family members what they want out of the business and what their key interests are.

3. Explain to everyone how the business, overall family, and individual best interests are being addressed.

Next: Considering extended family


Considering extended family

4. Establish which family members will be involved in detailed discussions. “To ensure focus, avoid chances for a free-for-all,” Worley advises. “The head of the family plays the key role, and intimate discussions should be limited to family members who currently are in the business and those who would inherit it,” she says.

While spouses and extended family may not be directly involved in the family business, they should be always kept informed. “They are influencers,” Worley says. “While they may not be involved in the business directly, they tend to be supportive if they have been kept abreast of the direction.”

And on a negative side, deal with potential divorce. This may make everyone very uncomfortable, but is akin to requesting a prenuptial agreement before a marriage, Worley says.

“Ideally, this should be discussed before a marriage occurs, so the future spouse understands the intentions regarding business succession,” she says. “If the main goal is to have the business stay in the family, let the spouse know he or she is a valued part of the family—and the business, if he or she also works in it.”

Buy-sell agreements (see below) allow for the spouse to be bought out and fairly compensated in the event of a divorce.

Restaurant owners choosing to pass on their business to a non-family member should ensure that person wants the business.

5. Decide which topics are up for discussion and which are taboo before the leader addresses everyone involved. “Discussions should stay focused on the issues that are the most important,” Worley says. “Too often, discussions sidetrack into areas that are not critical to the succession planning, at least in the early stage.”

6. As the leader, spend some time asking yourself some questions. Some to consider, Phillips says:

  • Do you want the business to remain in the family? Or do you want to sell to employees, or outsiders?
  • Do you want to sell the business to whoever is going to receive it and invest the proceeds in your retirement, or do you have sufficient cash flow without selling?
  • Do you want to gift some or part of the business to reduce taxes and the worth of the business? If you do, the best time to do it is this year. This year (and in previous years) a person is allowed to gift up to $5.12 million over his or her lifetime. That amount is expected to drop to $1 million in 2013.

“Once you’ve answered these questions, you’ve got some tools,” Phillips says. “If you’re considering selling your business to an employee or someone who’s already an owner in the business, you have to put it in a buy-sell agreement (more below), which details what will happen in the event of death or other situation such as disability.

7. Create an agenda of topics to be discussed with everyone involved in succession planning. Topics can include:

  • Which family members are interested in being involved in the business?
  • Are they comfortable working with other family members, and in what capacity?
  • What is the current state of business affairs and current valuation of the business?

According to Worley, topics shouldn’t include: amounts of ownership being given or offered to a family member; when ownership is or will be given; amount of assets to be given; and future management structure and responsibility of each family member. “Jumping too soon into these topics can derail the entire process,” she says.

8. Once there’s a plan, sit down all those involved and tell them the plan and the reasons behind it. The business owner should also mention, Phillips advises, that it’s not really up for discussion.

“You can open it up for discussion if you want,” she says, “but usually it’s not a good idea. These are your assets, and you’re free to do with them what you want. Family members are free to offer their opinion, but the owner doesn’t have to listen to them.”

Next: Mistakes we make


Mistakes we make

Succession plans are complicated, emotional, and often unpleasant to think about, but the biggest mistake a business owner can make, Phillips says, is not creating one.

The next biggest mistake, she says, is a business owner not talking with his or her family members.

“Communication is extremely important. You want your family to stay intact after you’re gone. The last thing you want to do is all this planning, then on your passing, your family is all very unhappy because they’re not aware of what you planned.

“So once you’ve decided what you want to do, in my opinion, don’t keep it a secret. … It’s best to communicate and get everyone’s OK on it, and that ensures your family is more likely to stay as a unit. It makes it much easier for a family if you’re all on the same page.”

Unfairness is sometimes deliberate, if one of the owner’s children is more involved in, or more competent with, the business, for example, Phillips points out. But if an owner wants to give more of his or her business to one child without being unfair, he or she can usually compensate with other assets that are not involved in the business.

Buy-sell agreements

A buy-sell is an agreement between a business owner or owners and those to whom they intend to pass on the business.

This legal agreement is comprehensive and typically covers what will happen in situations such as death, disability, desire to sell to a third party, retirement, divorce, and bankruptcy.

Buy-sell agreements list exactly what should happen in these cases, including who can purchase all or part of the business, what price would be expected, and which events will trigger a buyout.

“Family businesses are normally closely held,” Phillips says. “These buy-sell agreements address who we [lawyers] will deal with.”

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