Succession Planning

Succession planning doesn’t have to be feared with the proper approach to the future management change.

Succession planning: Does any term spark more fear and trembling in the mightiest business baron? The thought of stepping down from the pinnacle of power causes such dread that most managers put off planning for smooth leadership transitions.
The reasons for such apprehension are obvious. Designing a succession program demands not only time and effort but also sensitivity. Understanding the psychology of the people affected by a transition seems as important as knowing the intricacies of accounting rules and tax laws.

And, of course, planning for one’s own departure strikes unpleasant vibes. “Many people are unwilling to address an issue that is tied up with their own mortality,” says William J. Rothwell, a professor of human resource development at The Pennsylvania State University, State College, Penn. “It’s like getting a phone call from someone who wants to sell you a tombstone.”

That’s not all: Doing the job right means involving everyone likely to be affected by the changeover. That can be traumatic. Individuals will have conflicting expectations of their positions once current ownership changes. Especially in a family business, the topic of transition can open old wounds you may like to think have healed forever.

Do the right thing
Failing to plan adequately for the death of a business owner can have tragic consequences. When the time for transition comes, hurt feelings can scuttle the smooth operation of the business. Furthermore, unanticipated federal and state inheritance taxes can be so severe that the business may need to be liquidated to pay the debt.

There’s a lot at stake, and successful business owners will take a proactive stance.
“As an employer, you need to get your act together now,” cautions Rothwell, who lectures around the country on succession planning. “Systematically develop your own workforce to meet your future needs internally. You need to take advantage of the talent you have right now and build it so you are ready to seamlessly hand off power at the right time.”

Rothwell’s key point is this: Though we tend to concentrate on the traumatic event of a change in business ownership, it’s smart to take a wider view of succession planning. Succession planning is actually an ongoing process in which you anticipate, and plan for, the retirement or departure of important individuals throughout your business.

Rothwell’s suggestion is to project the estimated retirement date of key individuals in your entire workforce. Then analyze the areas of greatest risk to the healthy continuation of your business. The results are often surprising. One year a business may not lose any key people; another year some 20 percent or even 40 percent of the most experienced workers may retire.

Tax planning
The tax consequences of business succession deserve special attention. As do many other countries, the United States levies a tax on property passed along at the owner’s death. The term “estate tax” refers to a levy against a property prior to transfer, while an “inheritance tax” often refers to that which is levied on the individual receiving property from the estate. From the standpoint of financial planning, working in tandem with these taxes is the “gift tax.” This is intended to prevent large estates from avoiding taxation by lifetime giving. Finally, there’s one more level of complication: States have their own estate taxes that come into play alongside the federal versions.

There’s good news on this front, because the tax laws are changing to allow more liberal transfer of assets. You’ll find a schedule of such changes on the IRS’ Web site. Reductions to federal estate, gift and generation-skipping transfer taxes are gradual over the next seven years.

You can find some great resources on the Internet. Here are five top sites for succession planning.

1. The Estate Planning Links. www.estateplanninglinks.com
This is the best portal to Web sites with succession planning information. There are scores of links here, with everything from consultants in the field to advice and published stories on taxation. Make a point to click on the bookstore link at the upper left. You’ll get a great list of books hooked directly to amazon.com for online ordering. This makes it easy to track down a useful reference on some fine point of succession planning.

2. The Family Firm Institute. www.ffi.org
This is a great resource for finding consultants who will help with both the psychological and financial aspects of succession planning. Click on “Consultants and Speakers” at the left side of the screen for direct access to a useful search engine.

3. The Legal Information Institute. www.law.cornell.edu
When you’re seeking information about a particular legal wrinkle in the estate and succession planning fabric, this is the place to go. Kudos to Cornell Law School for putting together this site outlining key legislation and recent court decisions. Click on the “Law About...” menu at the left side of the screen. Click on “Taxation” in the submenu and you’ll see a link to “Estate and Gift Tax.” There is a page with great links to federal and state resources as well as links to the laws that relate to the Federal Estate Tax (Internal Revenue Code,  26 U.S.C. 2001), and the Federal Gift Tax (26 U.S.C. 2501.)

4. Forbes Estate Planning. www.forbes.com/estate_planning
This site provides continually updated news about the field. It includes contributions by leading business people and links to other financial information.

5. Internal Revenue Service. www.irs.gov
Click on “Businesses” at the lower left side of the screen, then on “Estate and Gift Taxes.” This takes you to a screen with many links to the latest tax law changes in the subject area. The information on this site tends to clarify some of the fine points on such matters as annual exclusions and annual tax rates.
If there’s any one message shared by all of these sources, it’s this: The wise business owner takes steps early to plan for a smooth business transition. As difficult as it is, succession planning must be approached. Maybe the task is a large one, but the time required can be reduced considerably by leveraging the services of your accountant, attorney and other outside experts.

Phillip M. Perry is a freelance business writer based in New York.

State Tax Bills to Rise

Maybe the federal government is planning to phase out estate taxes in 2010, but business owners shouldn’t rest easy. The fact is that states from coast to coast are rushing to shore up revenues by uncoupling their estate tax schedules from the federal one. That means one thing—businesses will be shelling out to state governments much or all of the money they expect to save in federal estate tax.

High taxes are bad enough, but the uncertainty of the future changes in the state tax structure increases the risk factor. It does dramatically increase the uncertainty level in planning for a business event that is already complex because of legal, accounting and management issues involved.

In extreme cases, uncertainty can cause management to make a conservative decision. It’s better to close the business down rather than take a chance that cash flow projections will be smaller than projected.

That’s all the more reason to start planning early and develop alternative scenarios. Estate taxes can create a large cash flow issue, and this is a problem that small businesses will continue to have to cope with.

Hit the Books

For owners who want to get a better grip on best practices in transition management, one of the best resources is Effective Succession Planning (second edition) by William J. Rothwell. This book concentrates on ensuring leadership continuity and building talent from within the business. It’s published by AMACOM, The American Management Association, and sells for $65. The book is sold through amazon.com, or order direct from AMACOM at (800) 714-6395.