What is Business Succession Planning in Estate Planning?

Business succession planning is the process whereby the ownership and management of a business, plan for the succession and continuation of the business based on triggering events such as death, disability, or a pre-determined date, at which the business interests passes to a successor. Those interests include ownership, management, top talent, and emerging talent in the organization.

Who is Generally Involved in Business Succession Planning?

Business succession planning involves stake holders, such as the owners, such as an individual, married couple, partners, and successors who will take over the business. The owners-to-be could be top talent or key people, who understand the business inside and out and can ensure that it continues for the foreseeable future.

Many business owners are concerned about their employees. Is the business going to offer an employee stock option plan giving the employees an ownership interest in the business? What will happen to the business owners’ immediate family members, who may have been relying upon business income for their support. Will they be compensated upon the demise of the business owner? Will there be a life insurance policy to pay buy-out the family, so the business passes to, surviving partners or key employees? Or will the family retain ownership via a stock transfer through a will or trust?

Obviously, your CPA should be involved in valuing the business and tax minimization strategies. The business attorney will negotiate the terms, structure the deal and prepare the necessary paperwork, to ensure everything goes smoothly.

What Are the Essential Components of an Effective Business Succession Plan?

There are several strategies for business succession planning. Many business owners will execute a buy-sell agreement, where triggering events precede an ownership transfer. Loans and annuities can be another way to structure the business succession planning, which may include an installment sale to new owners over time. Life insurance is common strategy for compensating family members upon the demise of the business owner, in exchange for ownership interests passing surviving partners, or new owners.

Additional solutions include selling business assets to an intentionally defective grantor trust, lifetime and testamentary charitable strategies, nonqualified deferred compensation plans, and employee stock option plans. The best strategy for your business depends on several variables, such as the nature of business assets, available financial resources, family dynamics, and whether family members are willing and able to take over the business. Does the business have hard assets such as real estate, machinery, tangible property, and inventory, or does the business mainly consist of soft assets like intellectual property and customer lists?

Other considerations include the business partners’ relationships to each other and outside financial resources of the business owner. Will the business owners have a cash flow problem after the business is sold, or do they have enough cash reserves to support them in retirement and provide for a legacy to their family when they pass away? Business owners must consider the role of employees in maintaining business value, and current entity type.

For more information on Business Succession Planning, an initial consultation with an experienced attorney is your next step. Get the information and legal answers you are seeking by calling (615) 628-7775 today.

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