Business Succession Planning

On average, only one closely held business in three successfully passes on to the next generation. A lack of proper transition planning is often why businesses fail after their founders retire, sustain a disability, or die. By implementing a business succession plan, you can help protect your company’s future. At a minimum, a sound plan may help you accomplish the following:

  1. Transfer control according to your wishes.

  2. Carry out the succession of your business in an orderly fashion.

  3. Minimize tax liability for you and your heirs.

  4. Provide financial security for you and your family after you step down.

To succeed, you need to examine the immediate, intermediate, and long-term goals of your family and your business. With a timeline in place, it is possible to fine-tune your plan based on the involvement you wish to have in the company and the future you envision for your business.

As you develop the appropriate tax and financial strategies, two important steps are valuating your business and deciding how to transfer ownership. There are many valuation methods. Depending on your situation, one technique may be more appropriate than another. The common goal for business owners selling their businesses is to reach a valuation that fairly compensates the owner for his or her interest, while making the price attractive to the potential buyer. Profit may be less of a concern for owners who are passing a business to children.

Owners have a variety of options for transferring ownership, and the most appropriate strategy depends on your specific situation, considering your personal financial and tax situation, your current form of business ownership (sole proprietorship, partnership, corporation, etc.), and the future owners (family, employees, third party, etc.). One or more of the following tax minimization strategies can play a key role in your planning process:

  • Gift stock to family members. Begin now so ownership can be transferred while avoiding unnecessary transfer taxes.

  • Employ a buy-sell agreement that fixes the estate tax value of your business. An effective agreement provides estate tax liquidity and provides your successors with the means to acquire your stock.

  • Create an employee stock ownership plan (ESOP), and sell your stock to the plan. Special rules allow you to sell your stock to the ESOP and defer the capital gains tax if you reinvest in qualified securities. Ownership can be transferred to your employees over time, and your business can obtain income tax deductions for plan contributions.

  • Plan to qualify for the estate tax installment payment option. It allows you to pay the portion of your estate tax attributable to your closely held business interest over a period of up to 14 years. Artificially low interest rates apply during the tax-deferral period. Other special rules apply.