The Importance of Succession Planning

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Why is Succession Planning Important in the Running of a Family Business

The Importance of Succession Planning

Ironically, Companies pour considerable resources into marketing, research and development, information technology and personnel development, but fail to plan for the succession of the company. It is extremely important to have a succession plan in place, and to communicate that plan to the senior executives/management team, while the company owners are alive and well. This allows the owners to explain their decisions to their successors, and begin to train them to take over.

  • First, your company might wind up in the wrong hands. If you die without a plan, your interest in the company will be included among all of your assets. The company will pass to the beneficiaries named in your will or trust. For example, your surviving spouse might inherit the business. If your spouse has no business experience and little aptitude for running a company, the enterprise that you grew and nurtured for many years might fail
  • Second, you and your loved ones won’t enjoy the fruits of your labor. Chances are, your business is your most valuable asset. You may not have saved enough, outside of your company, to provide for a comfortable retirement. Instead, you expect that cash from company dividends or from a sale of the business will enable you to maintain your lifestyle. What happens if you should get sick or injured, unable to run the business? Without a succession plan, your company could go into a tailspin. There won’t be profits to make dividend payments and the devalued company would not bring you much in a sale. In another scenario, if you die without a succession plan the company’s success may be imperiled. Now it will be your surviving spouse, your children, or other heirs who will suffer from your company’s loss of value.
  • Third, your estate might face a huge tax bill. Depending on the value of your company, the estate tax exemption, and estate tax rates in effect at death, you could face significant estate taxes. Federal estate tax rates in recent years have been as high as 60% and as low as 35% and exemptions have ranged from $1 million to $5 million. State inheritance tax might also be due. If you die with a company worth $10 million and $2 million of other assets, the total federal estate tax bill at a $1 million exemption could be as high as $6,340,800. If the federal estate tax exemption is $5 million, your federal estate tax liability could be as high as $4,180,800. Where will that money come from if your estate includes only $2 million outside of the business, as in this example? Your heirs could be forced to borrow heavily to pay the estate tax. They may even have to sell the company at a discounted price, just to raise money for taxes — which are due within 9 months of the date of death. 

With good planning, all of these problems and others can be dealt with in a proactive manner and taxes can be minimized. You can be sure that your company will pass into good hands; you can assure that the full value of the company will be realized if it’s sold, and you can reduce the future estate tax bill, while nurturing strong and lasting family relationships. Contact Anthony J. Madonia & Associates for information and assistance with your succession plan.