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Business Succession Planning

The entrepreneurs who start and grow businesses rarely take or feel they have the time to plan for the management and survival of their business after their incapacity or on their death. This makes sense, especially for the very successful entrepreneurs whose businesses generate tens or hundreds of millions of dollars in revenues, as such an entrepreneur often considers himself/herself to be invincible – which they are, at least until they have a stroke or die.

Many who do plan for their business think they’ve addressed all issues by having a buy/sell agreement funded by life insurance or through some other liquidity planning. Whether or not the hard driving entrepreneur has engaged in business succession planning, it often is the case that he or she has never delegated much responsibility to any of the people he or she thinks will take control of their business on their death.

The reality of life is that the worst time for the successors of a successful entrepreneur – whether they are family members or key employees – to decide what needs to be done on the founder’s death is right after the founder’s death, when the successors have lost a loved one, or at least a towering figure in their lives even if not loved so much. While the common perception is that most closely held businesses fail or have to be sold because there was not enough money to pay estate taxes, the reality is that the businesses fail or have to be sold because there has not been sufficient planning to enable the successors to survive and thrive in the business.

When the founder of a business dies, who is in charge? Do the key employees have confidence in the successor, or do they believe he/she occupies his/her position because of his/her relationship to the founder and feel their best course of action is to update their resume? Did the founder ever let junior make important decisions, and to live with the consequences of his/her poor decisions? (Parents have a tendency to rescue children, but it’s harder to come to the rescue after you’ve died, and for children to realize that there are consequences to bad decisions if they’ve always been rescued.)

After the founder’s death, who are the ten or twenty most important vendors or customers to call to reassure them that the business has a succession plan, and will continue to run smoothly? Who does the founder think should make those calls, and to whom? Of course, now that the founder is dead, getting answers to those questions from him/her is difficult unless they’ve done advanced planning.

Is the primary lender(s) going to yank indispensable credit lines? If the founder personally guaranteed loans, will the lenders accept guaranties from anyone else, and will any of those people want to personal assets on the line if they do not fully understand what the founder’s succession plan is, what their ownership interest in the business will be, and who their co-owners will be?

There are many, many complicated and emotionally laden issues in planning for family owned or closely held businesses. These difficult issues must be addressed in order for a closely held or family business, no matter how successful, to survive into the second, third or subsequent generation.

If you need assistance in any of these areas, do not hesitate to call Ken at (818) 865-0766 or (805) 497-6299.

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