Are you among the large percentage of the population nearing retirement? Have you considered how your family will be cared for in the event you become disabled or seriously ill and are unable to manage your business? What will happen to your family and your business if you die at an early age? These are the types of questions many business owners fail to consider until it is too late.
Business succession planning refers to the practice of developing a plan with corresponding agreements and estate planning documents to ensure that your business will be preserved according to your wishes. Succession plans vary from business to business, depending on a wide variety of facts and circumstances.
The following types of questions may serve as a starting point for developing a succession plan:
- Is it important to you that your business survive if you can no longer work or after your death?
- Are you counting on the business as a means of supplementing your retirement nest egg or as a continued source of revenue?
- Can your family run the business without you?
- If a family member is capable of leading operations, has he or she been properly trained and given the necessary support, authority and resources to take control of the business?
- If a family member will be taking the reins, has the transfer of your ownership interest been properly addressed in your Will or Trust and company documents?
If your family is not capable of running the business without you, thought should be given to who could, and would want to, take over operations. If keeping the business going would require an outsider, consideration should be given to whether the business generates sufficient income to pay someone outside the family to run it.
Another option, if you plan sufficiently far in advance of your retirement, is selling the business. Depending on the nature and structure of the business, some potential buyers will likely be willing to allow you to stay involved in the business as an employee or consultant and gradually transition yourself into retirement, thereby allowing you to continue receiving income by working in the business you know without having to start dipping into your retirement nest egg. While the sale of your business might present an attractive option as you approach retirement, it may not be a viable one should you experience an untimely illness, disability, or death. That is, if the business cannot successfully operate without you, it may become unmarketable once you are no longer capable of contributing. Even if you have someone to manage the business in your absence, if the customer relationships the business counts on were all developed and maintained by you, or your absence will cause a significant drop in revenues, the business may sell for substantially less than you expect. Thus, if the business will effectively shut down without your involvement, and cannot be sold, your succession plan will likely need to include, at a minimum, sufficient life insurance or other liquid funds to provide for your dependents.
If your business has multiple owners, the owners may seek to document what happens to your interest upon your death or disability. For example, the owners may enter into a buy-sell agreement, which mandates that the other owners will buy your interest upon your death or disability. Such plans are generally seen as mutually beneficial as they provide you with the peace of mind that your interest will in fact be purchased to provide for you or your dependents, and your fellow members get the benefit of knowing they will not end up in business with someone they do not wish to have as a business partner. Before entering a buy-sell agreement, some things that might need to be considered include:
- How will the departing members’ interest be valued (e.g. by appraisal, some multiple of annual earnings, etc.)?
- What specific events will trigger the sale of a member’s interest (e.g. member voluntarily leaving, member retiring, disability or death of a member, etc.)?
- Is the purchase mandatory (as opposed to in the form of an option)?
- Where will the funding for the purchase come from (e.g. does the company have life insurance policies on the members to ensure funds to buy-out the decedent’s interest upon his or her death) or what finance terms will apply?
Business owners may wish to work with their tax advisor to help transition ownership to the next generation or others in a manner that helps minimize the tax impact. Techniques, such as gifting ownership to children over a number of years while retaining voting control, have been helpful in this regard.
The foregoing are just a few of the many questions that will likely need to be considered as you begin to develop a business succession plan. Because each business and owner’s circumstances and objectives are unique, it is strongly recommended that you meet with a business attorney to assist in the development of a business succession plan that works for you, your business, and your family.
*Garrett Olexa is a member with the law firm of Jennings, Strouss & Salmon, PLC. He practices in the areas of estate planning, corporate law and litigation. Mr. Olexa can be contacted at firstname.lastname@example.org or 623.878.2222.