By Affiliate Colleen Pleasant Kline
Business succession planning is creating a roadmap of how you intend to exit your business. While it frequently refers to what happens upon the death of a business owner, it can also refer to retirement, disability, or the sale of your interests in the company to a third party, employees, or family members. Among other benefits, a successful business plan minimizes taxes paid by you, your estate, and your heirs. Just like a will, a business succession plan helps to establish your intentions for your business and may help to avoid disputes about how the business is to be operated if you become unable to manage it. Not having a plan can create problems for your family and other owners and may spell disaster for your business and its customers.
1. Start Now. It is never too early to consider business succession planning. The sooner you evaluate how your business is organized, the more flexibility and options may be available to you as part of your planning efforts. If you are thinking about buying real property or expanding, this might be a great time to start.
2. Consider More than Ownership. Too many business succession plans focus solely on the ownership structure and fail to consider how the organization will be managed and operated after the transition. Are you certain that your successor wants to take on your role? Does he or she have the necessary skills to be successful and continue to help your company grow even after you are no longer there? Failing to identify and groom tomorrow’s management can mean that your family members or successors waste their energy squabbling over control of the company rather than growing your business. If your plan contemplates equal division of ownership among two or more people without delineating management responsibilities, the company may find itself unable to operate for lack of clear leadership. Ultimately, your clients and business will suffer.
3. Make Planning a Team Effort. Your business succession plan should work in concert with your personal estate plan, so it is important that your attorneys, financial planner, insurance experts, accountants, business owners, and employees work together on the plan. Make certain that they share the same understanding of the plan so that any transition is as seamless as possible. If your estate attorney does not have sophisticated corporate or business legal experience, you may need to find additional counsel to ensure that your business plan is appropriate and well documented to work seamlessly with your personal estate, and vice versa.
4. Make Sure You Get Paid. If your business is the primary source of your income and your family’s income, your business succession plan must provide you with the necessary cash flow to continue your current lifestyle during retirement. Your plan should consider risks that might impact the likelihood that funds will be paid.
5. Use Life Insurance Wisely. Life insurance is a great tool in business succession planning, but it needs to be used and held wisely. You must have the right insurance for the right need and in the right amounts. In addition to providing your family with funds for their personal needs on your death, life insurance can be used to help fund a buy-out of your ownership interests, and it can also be intended as key man insurance to provide cash flow to the business. As your business grows, you may need to update or increase your life insurance to maintain the level of protection you hoped to provide to your heirs.
6. Maintain Certifications. If your business is a certified woman-owned business, minority-owned business, or veteran-owned business, you must take even greater care in creating and implementing your succession plan. Changes in ownership require notice to most certifying agencies, so be sure that your business does not inadvertently become ineligible.
7. Tune Up. Revisit your business succession plan (and your personal estate plan) from time to time to see if your goals or circumstances have changed and whether your plan needs to change as a result. In addition, you might be able to use periodic changes in the law to your advantage, for instance by accelerating portions of your plan. A good suggestion is to review your plan every few years, even if only to confirm that everything is on track.
DISCLAIMER: Opinions and conclusions in this post are solely those of the author unless otherwise indicated. This article is for general information purposes and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Since legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel. If you would like additional information on the subject matter of this article, please feel free to contact the author. IRS CIRCULAR 230 NOTICE: Any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding federal tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.