Business owners are often so busy with the day-to-day issues of running and growing their companies that the issue of business succession is often overlooked or left on the “back burner” until it’s too late. What would happen to your business if you died or were unable to work due to disability? Would your co-owners, managers, employees, and family members know what to do, and would they have the guidelines and tools needed to maintain your business?
While there are many ways to approach succession planning, there are some basic steps that can help create a comprehensive plan:
- Start now! Your family’s financial security may depend on a sound succession plan. Get an early start, and follow the process through to completion.
- Assemble a team of professionals. Because business succession planning involves a number of different areas, obtain assistance from all of your business and estate planning professionals, including your attorney and accountant, as well as your tax and insurance professionals. Meet with them, preferably together, to review your succession plan requirements. They will work with you to achieve your objectives.
- If you want your business to continue after your death, choose an appropriate form of ownership. The form of business you choose has tax, liability, legal, and business implications. If your business is established as a sole proprietorship or a partnership, it may be more difficult to transfer ownership after your death. To help ensure the business continuity in the event of the death or incapacity of you or one of your partners, consider converting it to a corporation. Corporate status provides for the “perpetual existence” of the business, as well as limited liability for business owners.
- Choose and groom your successor carefully. Choosing and grooming a successor may take years, if you want to familiarize him or her with the finer points of your business. Thus, it is important to select a successor while you are still active in the business. Choose someone who will be able to step into your shoes easily and help to facilitate a seamless transition. The successful transition to new leadership will depend on the person you select, as well as the training and experience you provide.
- Create a business “will” and a buy-sell agreement. The business will is a comprehensive planning tool that can detail, in step-by-step format, your plans for the continuation of your business, including your management plan. In your business will, you may also name your successor.
An important component to a business will is a buy-sell agreement. A buy-sell agreement can obligate one party to buy and the other to sell his or her interest in the business following a triggering event, such as the owner’s death or disability. A buy-sell agreement can be structured as an entity purchase (redemption) agreement, a cross-purchase agreement, a hybrid (combination) agreement, or a “wait-and-see” agreement. Your planning team can assist you in selecting the most appropriate structure for your buy-sell agreement.
- Consider funding your buy-sell agreement with insurance to enable your chosen successor to buy the business. Although a buy-sell agreement can help ensure your business will remain with your family or business partners in the event of your death or disability, adequate funds must be available to meet the commitments of the agreement. Life insurance is a simple funding vehicle that helps to ensure adequate liquidity should a qualifying event force the sale of an ownership interest. Disability buy-out insurance may also be purchased on the owners to fund the purchase of the business specifically in the event of a disability.
- Establish a dollar value for each owner’s share. For most small, closely held companies, it is not easy to put a dollar value on the business. You may need to obtain an independent appraisal of your business to help formulate your buy-sell agreement.
- Develop an estate plan that assures adequate liquidity to help pay estate taxes and other final expenses. Without prior planning, there may be no provision or funds available to pay estate taxes, which may be significant. You can avoid that situation by purchasing enough life insurance to help cover the cost of estate taxes.
You may also wish to consider transferring part of your business ownership to family members involved in the business using certain gifting or sale techniques. While relinquishing control of your business may be a challenge, it can help reduce your assets, thereby reducing your potential estate tax liability.
- Discuss your plans with all involved parties. By letting your family and management team know the basic details of your business succession plan, such as who will take over as owner and head of the company and why, you can eliminate any surprises. The business succession planning process can save your successor and your family a great deal of hardship.
- Review and update your succession plan as needed. Once your plan is established, review it periodically with your team of professionals to address any changes that may be required. If you have a major change in your business or personal life, be certain to immediately review your plan and revise it, as necessary.
The time you take today to plan for business succession can give you peace of mind that your wishes will be fulfilled when it comes time to transition your business to new ownership. Your family members and business associates can also benefit from your business succession planning.