Creating A Smart Succession Plan

More than 40 percent of family businesses expect a change in top leadership in the next five years, but 42 percent have not chosen a successor or lack a succession plan. As a small-business owner, you've likely spent some time thinking about your own succession plan. In order to develop a transfer strategy that meets your wishes and fulfills the needs of your loved ones, consider three key steps: (1) choose a successor, (2) reduce your exposure to estate taxes, and (3) find a way to fund the transition.

Surviving into the next generation: According to the Small Business Administration, less than one-third of family businesses survive the transition from first - to second-generation ownership. Of those that do, about half do not survive the transition from second to third generation.

1. Choose a successor - Though it's tempting to leave everything to a family member, there may be a better choice. Carefully weigh the individual's ability to keep the business running...to move it forward. It may be a better choice to put an agreement in place to sell the business to a partner and let your heirs use the money from the sale to pursue other interests.

2. Reduce exposure to estate taxes - In 2004, estate taxes could claim up to 48 percent of the gross value of your estate including your share of the business. In most cases, these taxes are due nine months after your death. This could make it necessary to dissolve or sell your business simply to cover the tax bill. There are ways to reduce this exposure using trusts, family limited partnerships, and other arrangements.

3. Find a way to fund the transition - If you set up an agreement to sell your share of your business to a partner, you need a strategy to fund that agreement. Otherwise, your passing could put undue strain on the business's finances. Many people find that a company-owned life insurance policy is an ideal way to fund a buyout.

1) "The Business of Family Businesses," Smeal College of Business, Penn State University, January 2004.
2,3) The use of these approaches can involve a complex web of tax rules and regulations. You should consult an experienced estate planning professional before implementing such strategies.

Bob & Mike Smith

We would like to thank our Member & Board Chairman
Robert M. Smith of Southpointe Financial Services for sharing
this article with us. To find out more about succession planning
he can be reached here in Southpointe Plaza 1, Suite 430
at 724-746-4100 or visit www.southpointefin.com