Succession Planning

Succession planning involves answering four questions: 1) who should own the business? 2) who should manage the business, 3) what is the most tax efficient manner to transfer the ownership of the business, and 4) how can I maintain control until I am ready to let go?

We help many of our clients address these issues. One of the chief concerns facing owners of family or closely held businesses is how to effect an orderly and affordable transfer of the business to the next generation or to a key employee. That objective, given adequate time and proper planning, can be accomplished easily and often profitably. But as most business owners know, seldom is there enough time available to accomplish day-to-day tasks, much less to plan for something unlikely to happen for years.

Failure to plan for orderly business succession can result in both monetary losses, and even loss of the business itself. Income taxes alone can claim 10 to 45 percent of a taxable estate, frequently resulting in businesses having to liquidate or take on tremendous amounts of debt just to stay afloat following an owner's death.

For business owners who've done all that they could over the years to avoid or pay off a debt situation, the prospect of the family going back into debt to pay taxes is unpleasant. Thus, one of the more important aspects of business succession planning is working out the financial pitfalls following the death of the business owner and answering questions like: Where will the money come from to pay taxes? Or, if the business has multiple owners: Where will the money come from to buy out the deceased shareholder's share?

Because customers often take their business elsewhere following the death of an owner or partner, how do you make sure adequate capital will be available to carry the business through what could be a slow transitional period? Many of these questions can be answered through the proper use of such funding vehicles as life insurance, annuities, and disability insurance with little or no net cost to the business. The time to work these things out is before the situation arises, not afterwards.

Business succession planning doesn’t end with an estate plan and life insurance firmly in place. It must also include a plan for transferring the trust, respect and goodwill that's been built up over the years. If the recently departed owner was a large part of the reason customers were willing to do business with the firm, these customers need to be reassured that they will continue to receive that same quality of attention and service.