The Need for a Business Succession Plan
As a business owner, the need for proper estate planning is essential, but in addition, a proper succession plan for your business is just as important. Given the fact that many small to midsized business owners spend a large amount of time and energy in making their business a success, and the fact that their business often represents a significant portion of the value of their estate, properly planning for what will happen with your business if something should happen to you should be a priority in order to ensure your organization lives on for years to come. Yet according to Wilmington Trust, 58% of business owners lack a transition plan. Neglecting to plan ahead can result in a missed opportunity to minimize tax liability, ensure the future success of the business, and save a surviving spouse or loved ones from dealing with a business that they have little to no knowledge of how to run.
The purpose of this blog post is to provide some of the considerations that should go into a business succession plan. It is by no means intended to be an exhaustive discussion of the topic. If you are a business owner, I strongly encourage you to seek legal, accounting, and financial planning advice. These professional outside resources can bring unbiased, expert viewpoints to complex issues and help lessen heightened emotions. They can also bring new perspectives and creative solutions to help position your company for its greatest possible success. Putting together a succession plan for your business will not only help your family and your business to survive if something should happen to you, but it will also be an asset to you down the road as you plan for your retirement and eventual exit from the business on your own terms.
The first step in business succession planning should be putting together an estate plan. An estate plan is essential to provide for an orderly transfer of wealth, minimizing tax liability and assisting loved ones through a very difficult time. The estate planning process involves, among other things, identifying assets and those individuals that will receive those assets, whether that be at the time of death or beforehand through strategic transfers.
Business owners that have children often hope that their children will follow them into the family business. Identifying which children have an interest in working in the family business as early as possible is critical for not only the continued success of the business, but also for ensuring that the transfer of the business is done in a way that does not strain the relationships of any involved. If the business represents a significant portion of the business owner’s accumulated wealth, then finding ways to transfer the business to those children that want to work the family business and those that do not can take time and requires careful consideration. If the business owns real estate, it may be possible to separate the real estate from the business and allow for a more equal distribution to all children by having the business lease the real estate. Lastly, using trusts or gifting ownership in the business over time may allow a business owner to transfer ownership and reduce tax liability. If there are children interested in getting involved in the family business, getting them involved sooner rather than later will allow them to learn the business and its customers or clients, which will ultimately increase the chances for the business’ long-term success.
Sale of the Business to Shareholders or Partners
Every business that has more than one owner should have a Buy-Sell Agreement in place as soon as the business is started. A Buy-Sell Agreement is an agreement among the business owners that deals with voluntary transfers during an owner’s lifetime, transfer upon an owner’s death, and ideally transfer in the event of an owner’s disability. This agreement should be entered into as early as possible, when everyone is getting along and the terms can be agreed upon. These are difficult topics to discuss, but as with everything, getting started early and planning ahead can make a world of difference. Often these agreements provide for life insurance, sometimes paid for by the company, insuring the lives of the owners and providing the funds necessary to buy out a deceased owner’s interest. Without life insurance, the business may not be able to support the surviving owner’s obligations to purchase a deceased owner’s interest.
Sale of the Business to an Employee or Employees
If a business owner does not have any children interested in getting involved in the family business or any partners to buy them out, another alternative may be to sell the business to a key employee that the business owner has identified as sharing their goals for the future of the business. Access to capital and financing may be an obstacle for a key employee to be able to afford buying out a business owner, so starting the planning process early can make a big difference.
Another possibility is the implementation of an employee stock ownership plan (“ESOP”), where the employees of the business purchase the business over time. Determining who will actually manage the business in this situation may take some additional planning, but ESOPs can provide a method for business owners to realize the value of the business for their retirement.
Sale to a Third Party
A business owner can also seek to sell their business to a third party as well; however, when it comes to succession planning, this should be an option of last resort. Predicting when death or incapacity may strike is impossible, and there is no guarantee that a third-party buyer will be available when the time comes to sell the business.
In general, the key to succession planning is to not delay. If you are a business owner and would like to start the process of preparing your succession plan, or need to modify your current plan, please contact one of our business or estate planning lawyers. We would be happy to assist you with this difficult but important process.
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