Business Succession Planning

By: Kevin Alerding - Partner, Ice Miller's Personal Services Group

For many business owners, the hardest part of succession planning is change. And change is perhaps the only certainty in a business succession plan. No change, no succession. You can read books, pay advisors, study techniques. But if you cannot change, then it will all be for naught.

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It takes a lot of courage to release the familiar and seemingly secure, to embrace the new. But there is no real security in what is no longer meaningful. There is more security in the adventurous and exciting, for in movement there is life, and in change there is power. - Alan Cohen

Although it has dropped in importance since the first Indiana CEO survey, succession planning continues to be an issue among the CEOs surveyed as part of the third annual CEO survey conducted by Inside Indiana Business, Ice Miller LLP and Butler University College of Business.

I think "business succession planning" is an unfortunate term. I put it in the same category as "practicing law." Planning (and practicing) is important of course � vital even � but only one phase of the process. The business owner still must implement the plan.

Business succession work � that's the term I use to refer to the planning and implementation phases � requires both operational changes and ownership changes. With respect to operations, the current owner must select the next generation of managers and leaders of the business. She must train them, and give them actual authority to make business decisions. She can set parameters but should not undermine the new managers' authority so long as they operate within those parameters. This is a lengthy process. It typically takes years, and might include a few false starts.

After the owner is confident that she has selected the right managers, and that they are progressing in their training, she should begin to formalize the new managers' authority. The owner might resign as CEO, for instance, to allow the new managers to take formal responsibility for the company's day-to-day operations. The owner might want to stay on the company's board of directors and continue as President. If the board consists only of the owner, or the owner and a few family members, it could be expanded to include business professionals who could assist in guiding the new managers.

Around this same time the owner also might begin to transfer the company stock. If ownership of the company will pass to family members who are not managers, then a compensation system should be implemented to reward the managers for the company's future success. If the new managers will be the new owners, then the transfer of stock to them would shift the economic risks and benefits of the company's performance to them, along with voting control. There are a variety of ways to transfer the stock including by gift, sale, or bonus. Each method has different tax consequences to the exiting owner and the new ones.

As the company brings on new shareholders, the ownership group should consider entering into a buy-sell agreement to provide for the future disposition of the company stock in the event of a shareholder's death, divorce, or incapacity, or in case a shareholder who works for the company retires, resigns, or is fired.

The transfer of the company stock to the new owners often takes several years to complete. During this period, the company should have a plan, along with the appropriate legal documents, to arrange for the continued operation of the company if one of the shareholders dies or becomes incapacitated. For example, what would happen if the exiting owner becomes incapacitated before she has transferred voting control? Who would have authority to vote the stock? In most cases it would be the incapacitated shareholder's spouse, or maybe a child. But the more appropriate option might be to give that power to one of the other managers, which could be accomplished through a special power of attorney. Similarly, after a shareholder dies, if his or her shares are not immediately purchased by the other shareholders, then one of the managers could be appointed as a special executor or trustee to vote the deceased shareholder's stock during the administration period.

Transferring ownership and control of a business requires a great deal of planning and attention, and some expense. But it is the implementation that matters most. If done well, the reward can be great. If done poorly or not at all, the consequences can be disastrous.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

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