Effective succession planning

By jcharles4

Preferred Benefit and Retirement Solutions


Your client's business is not only their pride and joy, but a major source of income for their family and employees. While the business is a large part of your client's life today, the reality is that someday he may want to retire, step back from the business to concentrate on new ventures, or become disabled or unexpectedly pass away. What would happen to your client's business if he was no longer around to run it? Putting an effective succession plan into place allows you to help your clients take the guesswork out of transferring ownership and provides peace of mind that their businesses, and families, are taken care of.

Like most business owners, your clients may plan to pass their business on to their family or sell it to co-owners. Ninety percent of the 21 million U.S. businesses are family-owned. Yet, according to SBA.gov, only 30 percent of family-run companies today succeed into the second generation, and only 15 percent survive into the third. A major reason for this is the tax cost of passing on ownership.

Just as it was when your client started his business, the key to successfully passing the business on is a well-thought-out plan. A well-designed succession plan can help meet your client's objectives and address management, control and funding of the business, as well as coordinating with your client's personal estate plan.

What constitutes an effective succession plan depends on the particular objectives. Every plan begins with deciding how one wants to transfer the business. Based on those objectives, there are many strategies that can help your client assure a smooth and complete transition of his business to new management and can control the tax burden for the new owners.

See also: Business succession planning: Are you talking about it?

Some of the transfer options to consider are:
  • Family limited partnerships – These partnerships may be appropriate when parents want to maintain some control yet shift income and appreciation to their children. This arrangement may also help consolidate assets and reduce estate taxes.

  • Employee stock ownership plans (ESOP) – ESOPs provide a method for owners to sell the business and possibly defer or even avoid capital gains taxation.

  • Irrevocable trust – In cases where the family has not identified a buyer but wants to protect the continuity of the business, an irrevocable trust could be the answer. This trust holds and manages the business after the owner’s death until the time is right to sell it.

  • Buy-sell agreements – In businesses with multiple owners, buy-sell agreements can be structured to facilitate smooth turnover of the business to the surviving partner(s).

  • Cross purchase – In this agreement, the surviving business owners purchase the deceased owner’s share of the business from the deceased owner’s estate based on the agreements established purchase price.

  • Entity purchase – When an owner dies, the business buys the deceased owner’s interest. The surviving owners then own the entire business while the deceased owner’s estate is paid the agreed-upon price. This is also known as a stock redemption plan.
Guide your client through the valuation process (vital in establishing the total worth of the business for tax purposes), recommend options that can help your client achieve his or her objectives, and provide vehicles for funding the plan. Collaborate with your client's attorney and accountant to build a succession plan that will help accomplish their objectives and is flexible, properly funded and cost-effective. Without a succession plan, the effect on one's heirs, estate and business could be devastating.