Business Succession Planning Is Important.
You Built Your Business. Now Make It Part of Your Legacy.
by: R. Kurtz "Kurt" Holloway, Esq.
In addition to estate planning, business owners must make arrangements for succession planning if they want to protect heirs and employees. Creating a business succession plan allows for the orderly and lawful transfer of control of your business, avoids disrupting business operations and negatively impacting the business’s value. Like estate planning, succession planning should not be a matter of “if” but rather a matter of “when.” No one likes to contemplate death or incapacitation. Think instead about how you can help your heirs and employees.
Succession plans can be temporary (for those who need to take a year or two off because of a serious medical problem) or permanent (upon death or a permanent departure from the business). Below are some key considerations for completing a comprehensive business succession plan.
What is your business worth?
A business valuation will help determine a business’s worth. There are several methods for determining the value of a business and often people choose to get an accountant involved when determining which method to use.
How will management of your business continue at your death or disability?
If you are a sole owner and you die, the “life” of your business can continue with proper planning. In the absence of a business power of attorney, corporate document, trust or will indicating who will “continue the life of the business,” a conservator or guardian would be appointed to act on your behalf upon your death or incapacity. This will take weeks or months and you will have no say over who is appointed.
While a will is important it may not be the best method to pass on control of your business. Trying to manage your business and administer your estate is a hard job for any one person. Also, a will does not apply in the case of your disability. Until the probate court appoints an executor for your estate and the business, a process which could take weeks, the management and day-to-day operations of the business may be suspended. A business power of attorney appointing an agent can also be effective but only for disability, not death. You can avoid these problems through succession planning using a trust to appoint a trustee to promptly step into your shoes upon death or disability.
Management should be a fundamental consideration in succession planning. Identify any key people who will be delegated authority for management and discuss the transition plan with them.
How will the ownership in the business be transferred?
A key tool used when selling or giving away ownership in a business is a buy-sell agreement. It will govern what happens if a partner in the business dies, is forced to leave the business, or chooses to leave the business.
How will the transfer be funded?
Do not overlook the need for your partner to secure funds to buy out your business interest.
Federal Estate and State Inheritance taxes are important elements of succession planning. Failure to plan for estate and inheritance taxes can lead to the “death” of a family business. It is very common for the bulk of a business’s worth to be in assets that can’t easily be turned into cash, i.e. real estate, equipment, machinery, or other tangible items. With little access to cash, your heirs may have to sell assets of the business to pay the taxes.
Life insurance or disability insurance policies are often used to cover these expenses.
Determining the best course of business planning often involves professional guidance. You should contact an attorney who is familiar with business succession planning to discuss what is required to meet your needs. This will require an analysis of your business, your family situation, your personal estate plan and tax consequences of different plan options. The proper analysis and plan will allow you to achieve your goals of continuity of your business. The time and money is well spent and will assure a smooth transfer of assets with minimal court involvement, avoidance of severe tax consequences, and assurance that your family’s and your business’s future will be secure.