By Scott Goldstein 6\/2\/2008 NJBIZ magazine<\/p>\n
Owners of closely held companies\u2014especially family businesses\u2014have a lot on their minds, and it often doesn\u2019t involve what happens if an owner or partner dies or leaves the company unexpectedly.
\u201cTo fail to plan is no plan. You are leaving things to chance,\u201d says Parag P. Patel, a Woodbridge-based business and tax lawyer who helps companies create succession plans.
Experts say most small and mid-sized private companies don\u2019t have succession plans\u2014and that can lead to confusion and loss for the business.
The main questions for a succession plan are: Who will lead the company? Who will buy out the deceased partner? And in the case of a family business, will the successor come from within the company or from within the family?
\u201cThese are challenging questions. It\u2019s better to have this conversation before a partner actually dies or pulls out, when the stakes and the emotions aren\u2019t as high,\u201d says Marguerite Mount, an accountant with The Mercadien Group in Princeton. \u201cYou can apply more intellect than emotion. That why it\u2019s called succession planning.\u201d
A succession plan addresses more than just death, she says. It can apply when a partner retires, gets divorced or becomes disabled.
\u201cDo you have one partner sell to the others? Do you find another partner to sell to? Do you continue operating the business the same way? And who will take the leadership role?\u201d Mount cites as questions that need to be explored.
And some of the answers help create a philosophy for the business as it currently exists, Mount says. Are you building the company to sell? To merge? Are you going to take the company public? Or will you let the company perpetuate in the same form?
When a partner is suddenly gone, the succession plan can designate whether the shares go to the departing shareholder\u2019s estate or are sold to the surviving shareholders, says Patel.
\u201cWith a plan, you won\u2019t have the remaining shareholders arguing and you won\u2019t have an unexpected shareholder entering the business,\u201d Patel says.
\u201cWithout a plan, you can have a bank become a shareholder in the case of a bankruptcy,\u201d he adds. \u201cAnd you can have a wife become a shareholder in the case of a divorce or death. There are many scenarios.\u201d
Setting up a succession plan involves communication and time.
\u201cFirst thing you need to do is set up a vision statement and if you can\u2019t do that between yourselves, then you need to have that facilitated,\u201d Mount says. \u201cThat can take the form of professional facilitators or you can use someone who has knowledge in your industry.\u201d
When The Mercadien Group is hired as a facilitator, it sets up a meeting among company partners in a \u201cretreat setting\u201d for a day, Mount says. Then the firm follows up to implement the plan with a broker or an attorney if a legal document is created, says Mount.
\u201cThe idea is to have a game plan that covers the inevi-table but unexpected.\u201d
A family business\u2019 succession plan should include a \u201cbuy-sell agreement\u201d that specifies terms of ownership am-ong partners and the value of their shar-es, Patel says. \u201cOf course, the lower the specified sh-are price, the lower the estate- and gift-tax value of the shares,\u201d Patel says. That \u201cavoids valuation disputes with the IRS, which may otherwise value the business higher and seek more on taxes after it is sold.\u201d
A way to reduce estate taxes is for a business owner to shift minority shares to family members before the owner retires, Patel says. The IRS taxes transfers of business shares among family at a lower rate than it does the inheritance of business shares, he notes.<\/p>\n
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