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Making Philanthropy Part of Your Leadership Succession Plan

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Ensure continuity and a smooth transition for clients, employees and the external charitable and community organizations that rely on your company’s support.

For many business owners, charitable giving is more than a personal priority. They often support it through company giving and volunteer programs as well. That strong commitment is reflected in the fact that nearly 68 percent of current business owners who intend to sell or pass their business down to a family member within the next five years plan to donate to charity in conjunction with that eventual transition.1

Business owners are charitable

Studies confirm that entrepreneurs and business owners donate more to charity, on average, than non-business owners.1

Incorporate Giving in Your Leadership Succession Plan

Given the deep and multi-layered commitment to charitable giving engrained in so many business owners, a change in leadership, or the outright sale of a company, can have ramifications for the charities and causes the company has actively supported over the years. It can also affect the nature and extent of an owner’s future involvement in those organizations.

To help ensure your vision for your company’s culture and charitable involvement endures regardless of who succeeds you, consider incorporating a philanthropy section into your leadership succession plan. By formalizing the process of giving, you can create continuity on how future management teams make charitable decisions and honor your company’s long-standing commitments. What follows are some of the key considerations for doing so.

Articulate and share your motivations and goals

Self-assessment

Start by understanding why your company engages in philanthropy.

  • Is it because you want to support the communities and employees who have contributed to the success of the business?
  • Is it to improve the brand of your business enterprise?
  • Is it to maximize your tax benefits?

While your values may align with certain charitable missions, like many successful business owners, your corporate giving may have ad hoc origins, and lack a formal mission statement or a strategic plan. By examining and sharing your motivations for giving within your leadership plan, you may find your decisions will be more impactful and you will be able to influence your successors regarding which causes to continue supporting and to what degree.

Identify the causes you care about the most

To successfully plan for philanthropy, determine the rationale you expect those who will eventually assume responsibility for the giving program to follow. That can still include accommodating causes that are important to you personally, supporting your employees’ interests, and establishing ongoing commitments that reinforce your company’s role in the community.

For example, if you started your business with capital borrowed from financial institutions, you may want to support a nonprofit organization that provides small loans for entrepreneurs. If your business manufactures environmentally friendly container products, supporting environmental organizations that work toward reducing non-biodegradable materials in landfills could improve both the environment and your company’s reputation.

Also, consider how you might shift your current giving to be more strategic and less reactive to make it easier to implement in the future. If you are currently giving to a myriad of organizations and causes, you may want to narrow the focus to a few pre-determined causes. This can increase the impact of your charitable dollars, improve results and be more fulfilling. Some firms will even hire a philanthropic advisor to help them sort through the many charitable causes, issues and strategies to optimize their corporate giving program’s effectiveness.

Establish a disciplined approach to charitable giving

Having a formal structure in place will not only make giving more efficient but involving other employees in the fulfillment of your vision makes it easier to scale the program as the company grows.

The process starts with identifying internal stakeholders and colleagues willing and able to help you make giving decisions and build relationships with the leaders of the nonprofit organizations you want your company to continue supporting.

Whether you plan to fund – or already have funded – a corporate giving program or make use of a discretionary charitable trust, create a governance structure and be transparent about who gets to make the decisions and under what circumstances. This will facilitate a buy-in from your leadership team, employees who share a vested interest in the success of the business, and from family members if the business is owned and managed by your family.

Finally, consider which resources to use for giving. Depending on the nature of your business, you may be able to give non-cash assets, in-kind goods or the benefit of your services to charitable organizations. While you may enjoy volunteering your time, offering that opportunity to your employees by providing paid time-off may make it more feasible for them as well. It may also be regarded as a perk, which can enhance your firm’s recruiting efforts. For companies that do not have products or services, allocating a percentage of profits to specific causes that are compatible with your corporate brand can also be quite effective in supporting your reputation externally.

Understand any tax implications

Charitable planning in advance of the sale of a business, particularly a closely held business, can minimize income taxes and maximize the after-tax impact of your contributions.

For example, the success or failure of a gift of closely held stock, made in advance of the sale of the business depends on a myriad of factors. Most significant of these are the nature of the asset – whether the business is organized as a C or S corporation, a limited liability company or a partnership – and the type of structure you use to convey the gift – through a private foundation, donor advised fund, or a charitable split-interest trust. Selecting the most tax-efficient method is something you will want to coordinate with your tax, legal and financial advisors.

Conclusion

Even if you already have a leadership succession plan for your business in place, it is never too late to add a philanthropy section. Doing so can mitigate any anxiety you or your charitable beneficiaries may have about the impact your decision to leave the business will have on their operations.

For guidance on including philanthropy in your succession plan, accommodating tax considerations and choosing and setting up the appropriate vehicles for giving, contact your Northern Trust financial advisor.

Business Owner

Plan for Continuity in Giving

Learn more about transitioning philanthropy to future leadership teams.

THE NORTHERN TRUST INSTITUTE

Proven Advice for Moments that Matter

  1. Entrepreneurs as Philanthropists – Understanding Entrepreneurs’ Unique Approach to Giving, Artemis Strategy Group, 2018.

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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