If you own or part own a business or a professional practice, it is important that your estate and succession planning begin today. As a business owner, it’s quite likely that a significant portion of your wealth–and your family’s source of income after your death–is tied up in the family business. The success of your estate plan is dependent upon the business being transitioned to the next generation or sold to someone outside the family for a fair price. Either result takes planning and preparation and business succession planning should be a priority for every owner of a private business.
Ask yourself a few questions. What would happen to your business if death or serious disability should suddenly happen to you or a co-owner or a key employee? Who would run the business?Would revenues decrease? Would clients take their business elsewhere?Do you think your business could survive?Without adequate planning, your business may be negatively impacted or forced to close in a relatively short period of time. Why? Not because you did something wrong, but because you did nothing.
Consider this: less than 30% of family owned businesses survive to the 2nd generation and less than 12% to the 3rd generation with only a 3% survival rate to the 4th generation. Why?
There are two common reasons why a family does not retain their business. The first reason is straightforward – there is no qualified successor. However, even though these businesses will not be passed down to the next generation, you can still take steps to ensure that the value of your business survives.
The second major reason for unsuccessful business transitions is more unfortunate. In many cases, businesses fail or are sold off due to a lack of planning. Although most of us are careful to safeguard our personal assets, for example by insuring our homes, many business people do not plan ahead to safeguard the value of their business. At first glance, this lack of planning seems incomprehensible. But, when you look at the personal and family issues that are involved, it is easier to understand why many people avoid dealing with the issue of business succession.
Running a business is hard work. The daily work needed to make a business successful leaves little or no time to plan for the ownership and management changes that will inevitably occur. None of us likes to think about or discuss our own mortality, but the process of succession planning, like good financial or estate planning, is all about what will happen after we are retired or gone for good. The longer owners wait to design and implement a succession plan, the greater the risk that the plan will not meet their goals. The risks also increase that the business will fail along with the health of the owner. When a business owner does not implement a succession plan before he or she is disabled or dies, the value of the business often drops rapidly. In fact, it is not uncommon that both the business and the business owner die on the same day. This means that the owner’s intended beneficiaries will not receive the full value of the business. Planning five years in advance is good but planning ten years ahead is even better.
All successful businesses, whether sole establishments, partnerships, LLC’s or free zone corporations, should plan for the eventual transfer, succession or sale of the business. Good business succession planning addresses the death, disability or retirement of a business owner as well as the sale of a business owner’s interest. A sound business succession plan will ensure that the business owner’s objectives will be accomplished, that the most effective business transfer is realised, that funds will be available to provide maximum financial flexibility and reduces the possibility of conflict among the remaining principals, employees and heirs thus lessening the prospect of costly and time consuming probate and succession procedures or damaging litigation.
Planning for your succession will, by necessity, be a process rather than an event, as it will take time to address these issues. Also, given that most of the major decisions to be made are of a personal nature, the process used to manage each family’s business succession will vary depending on the nature of the family issues involved. For example, there may be a Sharia element that requires careful planning.Consequently, there is no one approach that will work for all business owners.
In order to put a plan in place for the succession of your business, you may choose to use one of several methods such as a buy-sell agreement, an offshore trust or foundation, a private annuity, self-cancelling installment notes, a family limited partnership, management buy-out or a direct gift or sale. This is a complex area and a major decision involving, for many, their most valuable asset. The use of professional advisers is essential as they can provide knowledge and expertise in areas where you may have little experience. When seeking out professional help, choose carefully. Find someone with whom you feel you can establish a good working relationship. For first time meetings, be prepared to explain your situation and what you are looking for. Ask what services the firm provides and how it can assist you and do not forget to ask how much the firm charges for its services.
The writer of this article is Mark Nierada a solicitor, trust and estate practitioner (TEP) specialising in estate and succession planning for individuals and companies and Director of Legal Consultancy firm, The Wills Specialists, Licensed by Dubai Legal Affairs Department and The Rulers Court, Government of Dubai.
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