Source: JP Morgan —
Transitioning ownership of a commercial real estate organization can be a complex process. If you want to build a sustainable business that runs smoothly after you step down, it’s imperative you put time and effort into planning and executing your business succession plan.
“Too many times, failure to properly plan for succession has left family or related shareholders litigating over business interests,” said Steve Faulkner, Head of Private Business Advisory for J.P. Morgan Private Bank. “The prior generation could have prevented the fights with effective business and estate planning and conflict mitigation, saving significant dollars and avoiding the emotional toll of family conflict.”
Once you start the succession planning process for your real estate organization, think about the qualities, skills and culture you want in the next generation of ownership and how you can develop those traits in your successors.
Key issues to address when succession planning
1. Sudden events
“There should always be a ‘what if’ plan,” Faulkner said. Regularly review and revise contingency plans. They should include a clear vision of the company’s future, plus the roles and responsibilities of all future players. Plans should also include structures connecting the family or other invested parties with the business, as well as dignified and properly compensated exits.
2. Orderly transition
Craft a formal succession strategy with the same elements as your contingency plan. Focus on training and integration that covers business operations and legal documents such as your will, trust, shareholders’ agreement and insurance policies.
3. Liquidity and estate taxes
The current U.S. estate tax rate is 40%, and payment is usually due nine months after a person dies. As you draft your succession plan for the business, make sure you have an estimate of your estate tax and a plan to pay for it. Not having a plan in place may result in forced sales at distressed valuations. You can also consider wealth transfer strategies as a way to lower your tax bill.
4. Concentration
If your properties only appeal to younger renters or rely on a single vendor for management, you could be at increased risk. Diversifying your portfolio over time could reduce your risk during economic uncertainty.
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