Column: Six keys for a successful succession plan

By Theodore Bobroske

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Succession planning is the process of establishing a framework for the continuation and ownership of a business enterprise.   The business may be large, small, privately held or public.  Over time, all businesses need to transition.  Here are six key points to guide you in developing a succession plan that will help the company transition smoothly.

Theodore bobroske. Theodore bobroske.

Identify the goals. The day-to-day responsibilities of running and growing a business are often all-consuming.  Little time is left for thinking about the endgame.  We know for certain, however, that the business will transition at some point.  It is imperative that it happen on the business owner’s terms.  Should the business pass to family members, the management team or an unrelated party?  How long does the business owner want to stay involved and to what extent?  Once these questions have been answered, the review of succession planning tools and techniques can begin.

Communication is key! It is crucial that all key stakeholders (including family members as well as the professional team) are fully engaged and willing to provide material input regarding the overall framework of the plan.  Buy-in and alignment among all stakeholders is essential to a successful plan while breakdowns in communication can have damaging effects.

The plan should be solid but flexible.  Succession plans work best when they are well-defined but fluid and adaptable.  Established goals will often change over time.  It is the responsibility of the management team to address such changes in a timely manner, while managing internal and external expectations.

Focus on the future. Managing through a rearview mirror is a recipe for failure.  The most successful businesses are those that stay on top of current and emerging trends. Being cognizant of new developments that involve customers, competitors and vendors is very important, as well as being actively involved with an ever-changing regulatory and tax environment.

It’s not all about the money In many cases, business owners have founded the company and have been involved with the day-to-day operations of the company for many years.   They often have a deep emotional attachment to the business. Being mindful of this as well as the financial considerations is critical in designing the succession plan.

Seek professional expertise. There are many issues that require professional counsel such as tax, legal, estate and financial planning, valuation and investment banking. Numerous techniques and strategies such as Grantor Retained Annuity Trusts (GRATS) Family Limited Partnerships (FLPS), Buy/Sell Agreements can be very helpful in succession planning.  Be sure to seek skillful, competent professionals with experience in these areas as well as all facets of succession planning. Assemble a team of advisors who will bring creative ideas to the table in a collaborative fashion.

Among the most challenging decisions a business owner will make is the how and when to transition a business. Financial, tax and emotional considerations all come into play and while the focus for most business owners is on the growth of the business, it is never too early to have the discussion as to what the endgame is.  It is important to note that proposed changes under Section 2704 of the Internal Revenue Code would make significant changes to the valuation of interests in many family controlled entities.  The proposed regulations would appear to eliminate almost all minority (lack of control) discounts for closely held entity interests, including active businesses owned by a family.  While the effective date of the new rules is uncertain, the regulations could be finalized as early as the end of 2016. Given the potential implications, timely succession planning has become even more critical and now is the time to reach out to your advisers to begin the discussion.

Theodore Bobroske is senior vice president of Webster Private Bank in Greenwich. He can be reached at 203-869-1084 or tbobroske@websterbank.com.

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