In addition to estate planning, business owners must make arrangements for succession planning. Business succession planning refers to preparations for the orderly and lawful transfer of control of ones business to another (or several others) to avoid disrupting business operations or negatively impacting the business’s value. Like estate planning, succession planning is not a matter of “if” but rather a matter of “when.” No one likes to contemplate death or incapacitation. However, succession planning is important to preserving your business and your estate’s value.
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). Key considerations for completing a comprehensive business succession plan are below.
A business valuation will help you determine your business’s worth. There are several methods to determining the value of a business and often people choose to get an accountant involved when determining which method to use.
When the sole owner of business dies, the “life” of the business continues on. In the absence of a power of attorney, corporate document, or will indicating who will “continue on the life of the business,” a conservatory or guardian would be appointed to act on behalf of the incapacitated or deceased owner. Until the probate court approves and the creation of the estate and appoints an executor for the business, a process which could take weeks, the management and day-to-day operations of the business may be suspended. Business owners avoid these problems through succession planning, using a trust, and/or appointing a key person to take over the management or operations of the business.
Management should be a fundamental consideration in succession planning. When considering how to delegate management of the business, it is important to avoid concentrating critical tasks in one or a few people. Additionally, redundancies may diffuse risk. For example, when only one person has check-signing authority, and he is unavailable, the business is stuck without a person who can sign checks or possibly pay payroll. It is also beneficial to select key employees or other experienced persons who have had training or a background in the business or industry.
A key tool used when selling or giving away ownership in a business is a buy-sell agreement. A simple way to look at a buy-sell agreement is to view it as your business will – it will govern what happens if a partner in the business dies, is forced to leave the business, or chooses to leave the business. Like a will, the buy-sell agreement does not come into effect until one of the events triggered under it occurs, i.e., the business owner becomes disabled, chooses to leave, or dies.
A business owner should also plan to fund the transfer of ownership and/or management. What funds will be used to buy out the value of the ownership being transferred or bought? In the event of a death, what about estate taxes? Business owners often use life insurance or disability insurance policies to cover these expenses.
Estate taxes are one of the most critical elements to 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 some property to make the cash available.
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 often require a rather in-depth analysis of the business, the 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 in 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.