Ten Steps to Effective Succession Planning Step One: Identify and Prioritize Your Goals


A sound dealership succession plan addresses a long list of issues, including retirement income, transferring wealth to the dealer's heirs, transferring ownership, dealing with the income and estate tax consequences associated with an ownership transfer, and addressing other issues key to the ongoing success of the business; not the least of which (and often forgotten) is transitioning management. To help you address all important considerations and issues, the HBK Dealership Group developed, "Ten Steps to Effective Succession Planning." This article addresses the first step in an effective succession plan, identifying and prioritizing the owner’s goals.

You cannot address all business succession issues at once; what happens with one will affect how you handle another. Ideally, a dealer begins planning with a third party professional, one who has industry as well as succession planning expertise. This planning should begin at least ten years prior to an expected retirement date and should include a contingency plan should death, illness, a family situation or a change of heart require an earlier-than-expected transition date.

For many dealers, the dealership is like their child. They are committed to their business, to its grooming and success, and their ties to the business are emotional, just like with their offspring. Therefore, succession planning has to consider these emotional ties as well as the financial aspects of retirement, transfer and transition.

The first step in effective succession planning is to identify and prioritize goals. Succession plans have value for dealers only if they meet their goals. Identifying goals includes determining that they are realistic, and prioritization comes into play in resolving conflicts between mutually exclusive goals.

For example, if you are selling to a third party, you want a top price for your business but you also want to minimize the tax burden from the sale. It might not be possible to get both. We recently encountered a situation involving mutually exclusive goals. A selling dealer wanted to reward his employees for their years of service with extended separation pay, but it reduced the proceeds from the sale of the dealership. Ultimately, a good middle ground was reached whereby the employees were treated very well and the dealer was still able to receive funds sufficient to retire comfortably.

    The most common owners' goals in planning succession:
  • Keep the dealership in the family; transfer to the next generation.
  • Maintain a successful operation and profitability into the future.
  • Provide liquidity to the owner, or to his or her estate.
  • Provide financial security for the dealer’s family members.
  • Minimize current tax liabilities and the potential estate tax liability.
  • Maintain family harmony.

Family transitions can be fraught with conflicting goals. A dealer looking to maximize ongoing income to his children learned that getting the income he wanted would burden dealership profits to the point of threatening the future of the business. Again, some difficult decisions had to be made with regards to balancing these conflicting goals. A more common issue arising in family transition is either the lack of interest or leadership skills on the part of an incoming family member. Owners should not assume their children’s goals are the same as theirs; they often have other plans that do not involve the dealership. So succession planning must include determining which family members are in and which are out, and consider the transition of management (possibly to non-family members) as much as ownership.

    In light of those goals, we can identify five different dealer succession profiles:
  • Owners with children to whom they would like to transfer the business
  • Owners who want to sell the dealership to a third party outside the family member
  • Owners who want to sell the dealership to invest the proceeds in another business or investment opportunity
  • Where there are multiple owners, an owner who wants to sell to the partner or partners. Such sales can present troublesome situations, for example, where one partner who is not capable of managing the dealership is being bought out by another. We have seen long, protracted struggles over such issues as control and value.
  • Owners who want to run the business until their death. For these owners the contingency planning is particular important, that is, how to transition ownership and management in case of a serious illness or at death.

Even before identifying succession goals, you should work closely with a competent and industry-savvy succession planning professional to create a succession strategy. Such a strategy must be developed, understood and communicated in order to design and implement an effective succession plan.

To learn how your dealership is impacted by recent tax rulings, call Rex Collins at 317.504.7900. Or contact the HBK Dealership Group at 317-886-1624.

About the Author(s)
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.