Business Succession Planning FAQs

Most business owners know they need to protect their business from common threats such natural disasters, theft, and fire. In fact, one of the first things you probably did when you decided to start your business was to purchase insurance that would compensate you in the event of a covered loss. Imagine the potential loss to your business, however, if something happened to you. Without your guidance and management, everything you worked so hard to build could fall apart in a relatively short period of time. Business succession planning provides the legal and practical structure necessary to ensure that your business is prepared in the event of your death or incapacity.

Like the rest of your estate plan, your business succession planning component will be uniquely tailored to fit the needs of your business and to fit within your larger estate plan goals. There are, however, some common objectives you may wish to include in your business succession plan, such as:

– Designating of someone to take over the immediate day to day control of your business if you are incapacitated tomorrow because of a catastrophic accident or debilitating illness.

– Ensuring that everyone impacted, including employees, business associates, and family, is prepared to accept your designated replacement.

– Preparing the necessary legal documents to ensure that your designated replacement will have the necessary legal authority to step in and take over.

– Making sure that your family will continue to benefit financially from the success of the business in the event of your incapacity.

– Putting a plan in place for someone to take over permanently, or to sell the business, in the event of your death.

– Keeping the business out of probate if possible.

– Devising a plan to value your interest in the business at the time of your death.

– Preparing the next generation to take over the business if you plan to keep it in the family.

– Creating the most advantageous legal structure for the business.

– Anticipating the tax implications for the business in the event of your death.

– Making sure sufficient liquid assets are available to cover any tax debt that might be owed when you die.

Every taxpayer’s estate is potentially subject to federal gift and estate taxes upon the death of the taxpayer. If you own a small business, that business may become part of your estate and, therefore, be subject to estate taxes. The problem is that many new businesses, as well as certain types of businesses such as ranching and farming operations, can be short on liquid assets. The value of the business is often tied up in start-up expenses, inventory, equipment, livestock, and other non-liquid assets. The value of your business, however, will include all of those assets. If your estate owes gift and estate taxes, and the estate lacks sufficient liquid assets with which to pay the taxes, assets owned by the business might have to be sold to satisfy the tax obligation. Planning ahead is the best way to prevent putting your business at risk.

While your death would certainly create a giant vacuum in the operation of your business, so would your incapacity. Although people often associate incapacity with old age, the reality is that incapacity can strike the young as well. If you do become incapacitated, even for a relatively short period of time, it could be devastating for your business if you didn’t plan for the possibility.  Who would take over the day to day management of the business? Who would negotiate contracts with suppliers and resolve conflicts with clients/customers? Not only is it crucial to choose people to handle these jobs, but the people you choose to fill in must have the proper legal authorityto act on your behalf and everyone else involved must know that they are acting on your behalf pursuant to your wishes. Incapacity planning foresees the possibility of your incapacity and develops a plan to keep your business running if that possibility becomes a reality.

Small business owners often make the mistake of assuming that an adult child or senior employee is willing to take over the management of the business upon the death, or even retirement, of the owner, only to find out too late that their assumption was wrong. Of equal importance is ensuring that the individual you designate to step in and take over has the requisite legal authority and practical capacity to do so.  A well thought out succession plan will ensure that a successor is ready to step up and take over as smoothly as possible should the need arise.

If you plan to pass the business down to the next generation it is really never too soon to get started.One popular way to do so is to create a Family Limited Partnership (FLP). An FLP allows you to transfer your legal interest in the business to the next generation slowly, over time, while maintaining control over the day to day management of the operation until such time as you are ready to retire. Along with providing a slow transition of ownership,  you may be able to gain tax advantages by using an FLP to transfer interest in your business to future generations.

For the small business owner who does not plan to pass down the business to the next generation, it is imperative to consider what will happen to your business upon your death or permanent incapacity. All too often, surviving family members end up with far less than what the business was worth when plans were not made ahead of time that prevent such a result. One option is to enter into a Buy-Sell agreement. A Buy-Sell agreementguarantees the fair market value of your interest in the business in the event that the business must be sold at a later date. In essence, a Buy-Sell agreement is a binding agreement between you and someone who agrees to purchase your interest in the business in the future for a pre-determined price or using a fixed method of determining the fair market value at the time of the sale.  This prevents a buyer from taking advantage of your grieving loved ones, leaving them forced to sell your interest at a steep discount.