4 Key Areas Every Business Owner Should Take Control Of
As the world shut down in 2020, entrepreneurs lost control. The evolving business landscape forced business owners to orient themselves to the new reality and seize any opportunity that presented itself to survive. Some businesses thrived and many perished in spite of the talent and leadership ability at the top. The fate of a lifetime of work was left up to chance for everyone.
No one can tell us when the next disaster will occur or whether it will happen in our lifetime. However, there is 100% certainty every business is confronted with some transition, also known as "Succession," whether through a sale, gift, or death. Without taking control and putting strategies in place to towards the future you have envisioned, the fate of a lifetime of work will again be left up to chance.
Here are four key areas every business owner should take control of while they have the runway of time to do so:
1. Take control of your Estate Plan
Those of you who have not put together an estate plan or reviewed it recently, rest assured that the government has one for you. The latest proposed estate tax law changes from President Biden suggest:
- A decrease in the estate tax exemption from $11.7m per person today to $3.5m
- An increase in the top estate tax rate from 40% to 45%
- Any appreciation in assets would be taxed at death regardless of whether the asset is sold
It's unknown where the tax law changes will end up, but change is on the horizon. Acting now in today's favorable tax environment will help you take control and potentially preserve millions of dollars of the wealth.
It may never seem like the right time to make a gift or transfer assets to a trust. However, some strategies can allow an owner to "have their cake and eat it too." This means an owner and spouse can retain control of the asset transferred outside of the taxable estate while using the income generated by it. Whether the goal is creating a legacy for the family, fulfilling charitable ambitions, or merely making sure the IRS doesn't get too much, every business owner is better off implementing their own plan in lieu of the government's.
2. Communicate with the Franchisor
Estate planning is just one of the pieces to the succession puzzle that must be addressed. The ability to continue the business beyond the current owner, whether a sale or transfer to family, will ultimately require the approval of the franchisors. Recognizing that franchisees and franchisors share continued success in the future, communication regarding succession is critical to staying in control of the plan. It is prudent to initiate dialogue with franchisors about the approval process and requirements of the successor owner. Particularly as it relates to the franchise agreement which may have terms that undermine a succession plan. Knowing who can be approved and under what conditions puts the control back in the franchisee's hands. This step removes "I hope..." and instills confidence that the plan will succeed.
3. Communicate with the Family
Misaligned expectations among family members are disastrous to any family business. In the absence of family communication, family members will naturally make assumptions that develop into unreasonable expectations. Whether it is salary, employment opportunities, ownership opportunities, advancement in the business, or estate distribution plans, the business often becomes the battleground for misaligned family members to wage their war. Developing and communicating Family Policies in line with the business culture will provide the governance necessary to transfer control to those who are equipped to run it while eliminating detrimental family interference.
4. Communicate with the Management Team
In the absence of a communicated plan, it is common for talented key employees to consider other employment opportunities where their future has more perceived certainty. Like family members, key managers are prone to make their assumptions about a succession plan and become distracted from focusing on profitability. Taking control with the management team means controlling the narrative and reassuring the critical people that a strategy is being developed to protect all families dependent on the business's ongoing performance.
It is often essential for businesses with a successor candidate in development to communicate that a successor's advancement is not a zero-sum game. That is, the owner is committed to providing the opportunity for their key people to achieve their ambitions regardless of a successor's advancement. Fortunately, there are many types of retention plans, with and without direct business ownership, to ensure the management team remains committed to the business as long as the owner wants them to be. Without communication, a business owner is leaving the business's fate up to the feelings and assumptions of the management team.
There are many reasons business owners are motivated to put a succession plan together: preserving a legacy for the next generation; stewardship towards those that depend on them; tax avoidance and estate preservation; and personal lifestyle desires, to name a few. The bottom line is that most business owners care about what happens and want to stay in control.
Jeff Bannon is a partner with The Rawls Group - Business Succession Planners. Entrepreneurial owned businesses are close to Jeff's heart. With the recent passing of the baton of his family's law firm between his grandfather to his sister, Jeff has witnessed the benefits and rewards the planning process. For more information visit www.rawlsgroup.com or email firstname.lastname@example.org.
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