SHARE:
Generations
Without succession planning, chaos can follow the retirement, disability or death of the owner and destroy an otherwise healthy business.
Sunshine-Jr. Stores is an example of a business that was shaken because of inadequate succession planning. In 1944, L.D. "Sunshine" Lewis, his wife Leona and Lewis' brother opened their first store in Panama City.
When he died in 1981, Lewis' will included explicit instructions concerning ownership of the company, but there was no succession plan; he had not stipulated who would run the company. His family fought bitterly, and a nephew who helped Lewis manage the company was forced out. Over the years, numerous other family skirmishes shook Sunshine-Jr.
The company, with an estimated worth of $26 million in the mid-1980s, shrank to a market value of about $3.6 million and filed Chapter 11 bankruptcy in1992. Last year the company was sold to a Texas convenience store chain.
So what should small-business owners do to avoid the fate of Sunshine-Jr.?
Start early. Owners who plan ahead, anticipating estate taxes that could force their heirs to sell the business, often can arrange finances to reduce the tax, says Steven Messing, a partner in the Miami office of KPMG Peat Marwick.
Consult experts. Estate planning can be tricky, especially with new laws being passed regularly. Many larger accounting and law firms have associates who deal with succession planning.
Resolve family issues. Because it's often difficult to address personal and financial concerns in a family, this important area frequently is ignored. Michael Fay, a succession planning expert in the Boston law firm of Hale and Dorr, says most parents attempt to treat children equally, but that can lead to disaster in business. Instead, an owner must objectively evaluate heirs' unique skills, knowledge and energy levels. Children should be promoted based on competence and not the "rights" of inheritance.
Indeed, businesses can stumble by following the custom that a progeny, rather than the best qualified person, should always inherit and run the business. "Suppose a business owner has both a son and son-in-law," says Martin B. Solomon, a partner with Arthur Andersen in Tampa. "The son-in-law is talented, the son isn't. Who takes over the business?" * Make a succession plan and include answers to several questions (see below).
Prepare your successor. Unless the company's future leader is aware of all aspects of the business, he or she won't be prepared to set company objectives and financial goals.
Establish written ground rules. Spell out clear standards (age, education, work experience) that must be met before children can enter the business. One suggestion is to require each child to have a few years of job experience outside the family business. According to Fay, these children will arrive with a sense of accountability, aware that promotions are earned, not inherited.
How To Make A Succession Plan
The written succession plan should be the cornerstone of estate planning and include answers to the following questions:
1. Who will run the business? Name the successor(s) and the major players. What skills and knowledge do they have for running the business?
2. How will other family members participate in the company? Spell everything out and clear up any possible misinterpretations.
3. How will the successor(s) be trained?
4. How and when will authority be transferred? Will there be a certain date in the future when Dad decides to retire and transfer all control? Or will it be a phased transfer of control over a period of time? In the case of the death of the owner, is everything spelled out so that the transfer of control can take place immediately?
5. How will assets be distributed? In addition to responding to these questions, the owner might consider establishing a board of directors with some, or preferably a majority, community business leaders. Outside directors often provide expert management advice that helps the successor insure that the business continues to prosper.
