While there are many ways to approach succession planning, here are some basic steps to help you create a comprehensive plan:
Start now. Your family's financial future may depend on a sound succession plan. Get an early start, and follow the process through to completion.
Assemble a team of professionals. Because business succession planning involves many areas, obtain assistance from your team of qualified estate planning professionals, including your attorney, accountant, tax advisor, and insurance professional. They can work together as a team to help you develop a plan to achieve your objectives.
If you want your business to continue after your death, choose an appropriate form of ownership. The form of business you choose has tax, liability, legal, and business implications. If your business is established as a sole proprietorship or a partnership, it may be more difficult to transfer ownership after your death. To help ensure business continuity in the event of your death or incapacity, or that of one of your partners, consider converting to a corporation. Corporate status provides for the "perpetual existence" of the business, as well as limited liability for business owners.
Choose and groom your successor carefully. It is important to select a successor while you are still active because grooming your successor and familiarizing him or her with the finer points of your business may take years. Choose someone who can step into your shoes easily and help facilitate a seamless transition. A successful transition to new leadership depends equally on the person you select, as well as the training and experience you provide.
Create a business "will" and a buy-sell agreement. The business will is a comprehensive planning tool that can detail, in step-by-step format, your plans for the continuation of your business, including your management plan. In your business will, you may also name your successor. An important adjunct to a business will is a buy-sell agreement. A buy-sell agreement obligates one party to buy and the other to sell his or her interest in the business following a triggering event, such as the owner's death or disability. A buy-sell agreement can be structured as an entity purchase (redemption) agreement, a cross-purchase agreement, a hybrid (combination) agreement, or a "wait-and-see" agreement. Your planning team can assist you in selecting the most appropriate structure for your buy-sell agreement.
Consider funding your buy-sell agreement with insurance to enable your chosen successor to buy the business. Although a buy-sell agreement can help ensure that your business will remain with your family or business partners in the event of your death or disability, adequate funds must be available to meet the requirements of the agreement. Life insurance is a funding vehicle that can help ensure adequate liquidity should a qualifying event force the sale of an ownership interest. Disability buy-out insurance may also be purchased on the owners to fund the purchase of the business specifically in the event of a disability.
Establish a dollar value for each owner's share. For most small, closely held companies, it is not easy to put a dollar value on the business. You may need to obtain an independent appraisal of your business to help formulate your buy-sell agreement.
Develop an estate plan to ensure adequate liquidity to help pay estate taxes and other final expenses. Without prior planning, there may be no provision or funds available to pay estate taxes, which could be significant. You may want to consider purchasing enough life insurance to help cover the cost of estate taxes. In addition, consider transferring part of your business ownership to family members involved in the business using certain gifting or sale techniques. While relinquishing control of your business can be challenging, it can help reduce your assets, thereby reducing your potential estate tax liability.
Discuss your plans with all involved parties. By letting your family and management team in on your business succession plan, such as who will take over as owner and head of the company and why, you can help to minimize stress and confusion for your successor and your family.
Review and update your succession plan as needed. Once your plan is established, review it periodically with your team of professionals to address any changes that may be required. If a major change occurs in your business or personal life, review and revise your plan, as is necessary.
The time you take today to plan for business succession can help ensure that your wishes will be fulfilled when the time comes to transition into new ownership. Your family members and business associates will also benefit from your thoughtful consideration of their future needs.