Business Succession Planning: Cultivating Enduring Value
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Business succession planning Cultivating enduring value All six volumes in one collection This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Contents 5 Introduction 6 Volume 1: The need for planning 14 Volume 2: Establishing a foundation 26 Volume 3: Developing future leaders 34 Volume 4: Preserving personal and family wealth 50 Volume 5: Family dynamics and governance 64 Volume 6: Cementing a legacy 4 Business succession planning Introduction The operational demands of running a family business or This publication is a compilation of a six-volume series that other closely held enterprise can be all-consuming, but it’s addresses the broad range of topics that business owners vital that business leaders take the time needed to assess need to consider in order to facilitate an orderly transition their organization’s business succession planning. The of management and ownership, including: penalty for failing to get ahead of leadership or ownership changes can be significant, as the coming years may • How a strategic, long-term approach to business bring substantial transfers of wealth as businesses change succession planning can help meet personal and hands and adopt new ownership structures. The long-term business goals — and how to get started. survival of a business, and the preservation of the wealth • How the choice of entity structure, valuation methods that has been built, will likely depend on getting ahead of and financing options can impact succession planning — those changes through strategic succession planning. and outcomes — for private businesses. • How management talent assessment, development For private, owner-managed, or family-owned businesses, and compensation planning can help solidify the next a solid succession plan can drive the growth of the generation of company leadership. business, reduce taxes, and set the stage for retirement. • How planning ahead for estate and gift taxes, life Family-run businesses may benefit further by focusing on insurance and investments can help address family and preserving harmony within the family. business needs and meet retirement goals. • How to balance business needs and family concerns in order to create a long-term governance plan that can help the business and family prosper together. • How adopting leading practices and strategies can help confirm one’s legacy isn’t left to chance. Taken together, these issues demonstrate that succession planning is an important and evolving process. This is not a subject to be put off until later; to be done successfully, it needs to be an integral part of a company’s business strategy and operations. This publication is a compilation of a six-volume series that addresses the broad range of topics that businesses owners need to consider in order to facilitate an orderly transition of management and ownership. Cultivating enduring value 5 Volume 1 The need for planning A plan for permanence For a business, working without a succession plan can No one goes through the work, risk, and sacrifice invite disruption, uncertainty, and conflict, and endangers of starting a business without hoping it will last. future competitiveness. For companies that are family- Building value that endures is the dream that motivates owned or controlled, the issue of succession also entrepreneurs. Yet in many businesses, too little of that introduces deeply emotional personal issues and may work goes into determining who will take over when the widen the circle of stakeholders to include non-employee founders leave the stage. family members. According to the National Association of Corporate The next 10 to 15 years may bring substantial transfers Directors, fewer than one in four private company boards of wealth through business ownership handoffs across say they have a formal succession plan in place.1 There generations and other new ownership structures. The long- isn’t a good reason to justify the common oversight of not term survival of those businesses, and the preservation of planning for business succession. Some business leaders the wealth they have built, will depend upon a clear and are too caught up in the challenges of the present. Some early focus on strategic succession planning. have a subconscious aversion to the reality that they won’t be around forever, or assume succession will work itself out naturally. Others are aware of the task’s true complexity and find it overwhelming. Ultimately, however, the reasons people avoid succession planning aren’t as important as the reasons they should embrace it. 1 http://www.nacdonline.org/AboutUs/ PressRelease.cfm?ItemNumber=4699 6 Business succession planning Not so simple The need for planning Succession planning is a complex process that draws upon Succession planning is a multidisciplinary process. When many business disciplines. Many privately held businesses you engage in succession planning, you’re not just display solid professionalism and enviable profits in their focusing on the future, because it’s impossible to plan for daily operations, yet fail to properly plan for and complete the future without a deep understanding of the present. the transition to the next generation of leaders. Even Leaders have to know the current reality of their businesses the most sophisticated and knowledgeable business — how they operate, where the value lies, what their professionals can get caught in a web of complicated needs are, who their most vital customers are and why — issues. In fact, many business owners do not carry out a in order to prepare for new leadership and new structures managed transition to a successor leadership team. In the that can provide continuity in the ways that matter. case of family-owned businesses, only 30 percent survive into the second generation, 12 percent survive into the There are many benefits for companies and owners who third, and only about 3 percent operate into the fourth plan properly and strategically for an orderly transition of generation and beyond. management and ownership: An owner-manager usually has a personal vision to retire • Survival and growth of the business or its assets — and sell the business “someday,” but he or she may not have under the current structure or after sale or restructuring adequately considered what it will take to make that vision a • Preservation of harmony when the business is family- reality. Even leaders who profess they’ll never retire have to owned acknowledge that no one remains at the helm forever. • Reduction or elimination of estate and income taxes • Facilitation of retirement for the current leadership An unprepared new management group, or even a generation poorly managed transition to competent management, • Ability to retain control of the process instead of having can trigger significant loss in value. If leaders want their someone else make decisions businesses’ intrinsic value to remain intact for the benefit of their successors, they should begin the planning process sooner rather than later. Many leaders choose to embark on a long-term program to identify and groom the company’s future executives. In some cases, a careful planning process may reveal that selling the business instead of maintaining successor ownership really is the answer for their situation. Not all succession plans are created equal. If your business has a succession plan in place, the questions on the facing page can help determine how effective that plan and your current practices actually are. According to the National Association of Corporate Directors, fewer than one in four private company boards say they have a formal succession plan in place. Cultivating enduring value 7 A multidisciplinary platform The owners of privately held businesses face complex If succession planning isn’t as simple as some may believe, planning issues. For some, the first order of business how can leaders make sure they’re covering the necessary is the long-term success of business operations, which bases? An inclusive approach focuses on there categories of encompasses a host of distinct issues. For others, the crucial components: priority is the preservation of family wealth through estate, gift tax, retirement, insurance and investment planning — Family an equally complex challenge that may not always align • Goal articulation perfectly with the aim of perpetuating the business. • Family information and communication • Estate and gift planning These issues should be part of a long-term strategic plan • Life insurance analysis that accounts for the needs of the business as well as the • Investment advisory