One Direction Doesn’t Work in Business Succession

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One Direction Doesn’t Work in Business Succession

By Diane M. Calabrese / Published August 2016



Business succession does not work in one direction. There is a successor, as well as someone who sells or otherwise relinquishes ownership. Emotion runs high in any transition of ownership. A new owner will be excited about the possibilities and the risks. The individual who has moved from the ownership position may experience elation at being set free from responsibility, sadness at moving on from a much-loved commitment, or both.

Family-owned businesses are not immune from the volatility of feelings. Perhaps the most difficult situation of all in a transition is when a long planned transfer of ownership to a child seems imprudent. An owner does not want to give up ownership of a successful company to someone who, on all evidence, seems incapable of making a go of it—whether child or not.

Evasion and procrastination are not options. There must be a succession plan. “A succession plan is no different than plans currently in effect, like a budget or sales plan or all planning aspects required to operate,” says Bill Sommers, president of Pressure Systems Industries in Phoenix, AZ. He adds that business owners who do not want to do succession planning ought not to be owners.

“Making a decision on selling the pressure distribution business or having it continue under the auspices of a family member is a huge undertaking,” says Sommers. “There are plusses and minuses in either direction.” Whichever course is taken, reality must be a check on the future. “Your first action of business is to recognize that once the plan is activated, the business will not operate the same way as the continuum of the horse you rode in on,” says Sommers

“Should you think that being around and available would smooth the transition, ‘forget about it,’” says Sommers. He recommends severing ties completely to avoid complications. “If you should make the mistake of leaving your equity as a monthly pay out, anticipate having to come back in and save it and your retirement,” explains Sommers. “So much is commingled and intermingled, the chore becomes a stress test.”

Even when the new owner will be a relative, do not skip any legal or accounting steps required to make it a good transition. “One of the first actions required, especially should you sell to a close relative, is to perform a memorandum of understanding,” says Sommers. “An example: I will do this and you will do that. That should clear the air to disclose any hidden agendas.”

From the principles in the memorandum of understanding, a contract can be developed with both CPA and lawyer involvement, explains Sommers. “The format is extremely important as if it is done improperly, it will lead to dissension. If you want to continue to see the grandkids, make sure all parties are onboard the five-year plan.” Sommers stresses the bottom line when he says, “Until legal entities are taken care of, the operation of the company should stay on the same track.”


Determination to build a successful company has to be coupled with the resolve to make plans for what will happen to it when the owner decides to move on. There are many good ways to obtain advice about succession planning. The library at the website of the Small Business Administration (www.sba.gov) provides several tools and articles related to the subject.

If the successor will be someone from within the company, which is often a family member in a small  business, allow the individual to take over more and more management responsibilities across time. Guide the individual. In the end, though, realize that the person will change things just as assuredly as will a new owner from outside the company when they take over.

Context helps with it-is-not-the-way-I-did-it heartstrings. Is the new owner really any more enthusiastic, more risk-taking, or ‘greener’ than  you were when starting the company? Put it all in perspective.

Moving on is much easier for an owner who has planned not only for succession but for what will happen post-ownership. Perhaps starting another business is the plan, or perhaps it’s a pause or retirement. Whichever choice is made, the funds must be there to allow the path to be followed.

Also, for those who have built a business strong enough to be passed to a new owner, it’s good to take some satisfaction in what’s been built. Be happy about having created a solid entity. There are some exits from business that are forced, as in bankruptcy, and they are not pleasant but necessary.

An outright sale, gradual sale, and lease agreement are all options for transferring ownership of a business. Each has advantages. An outright sale offers the chance for a clean break. Gradual sale allows the owner to exit, even when the buyer cannot pay the full price in one transaction. Lease agreement enables an owner to take time for another pursuit. Obviously, there is more risk in a gradual sale or a lease agreement than in an outright sale, but they are useful tools that work for some owners.

Expert Advice

Dr. Bart Basi, a CPA/attorney at Basi, Basi & Associates at The Center for Financial, Legal & Tax Planning Inc. in Marion, IL, answers some questions for us.

Cleaner Times (CT): How can an owner who is consumed with running a business find time to do succession planning?

Basi: This is one of the most important aspects of owning a business. I recommend that the owner or owners take some time away from the day-to-day operations of the business and devote time to working with a professional succession-planning advisor to review the options available and the timing of the implementation of a succession plan. There is no excuse for not taking time away from the business to work on developing a succession plan. Also, all succession plans should have a contingency component to the plan, in the event of a death or disability of the owner.

CT: What’s the best reason for having a succession plan?

Basi: While there are many reasons, the overriding issue is retirement. Everyone wants to be able to slow down and retire from the day-to-day running of a business. Owners of private companies are no exception to this concept.

CT: How does the day-to-day operation of a business become easier for an owner who has a clear succession plan?

Basi: A key component to a properly-drafted succession plan is to know what is going to occur and when it is going to occur regarding the implementation of the succession plan. Once the plan is drafted, owners can then operate the business knowing that when the time comes, they will be able to step away from the company and not lose any of the value that they have worked so hard to create. Remember, the creation of a succession plan does not mean to sell, give, or merge the business today. When I work with a client on succession plans, we develop a plan that will go into effect in the future. As long as the future date is set, either by an event or specific date, the owner can then work with the knowledge of leaving the business in the future. The documents that we draft are referred to as executory contracts in that they are signed off when prepared but go into effect at a future date or event.

CT: What should we have asked you?

Basi: Too many owners do not consider all of the aspects that go into a succession plan. It is not enough to just determine who is going to take over the business; it is important to know what the business is worth now and how it will be valued when the succession plan goes into effect and the tax ramifications of the plan.

I worked with a family that owned a very successful family business but did not know what it was worth and who would take over the business. They were very concerned with the taxes due to an accountant telling them that they should wait until the senior family members died. We valued all aspects of the company, set up a method that all family members agreed to, selected the successors and put in place a training program so that the successors could work with the current management to learn the key elements to owning a private company, set up a retirement program for the senior members of the family, and also had all other family members sign off on the overall plan and their involvement with the business. The plan was approved by a family local attorney, and my office not only developed the plan working closely with all family members, but we also prepared all of the documents, while at the same time considering the tax implications of all aspects of the succession plan. 

If the wrong advisors are used and the tax aspects of the succession plan are not considered, the plan may cost a lot more than expected. In this case, we were able to save the family in excess of $3,500,000.