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Family & Small Business Succession Planning

Nothing Is Certain but Death and Taxes

Benjamin Franklin famously wrote that “nothing can be said to be certain, except death and taxes.” This adage is profound, but I would politely disagree with Mr. Franklin. I believe there is a third certainty: You will leave your business one day. Now, you might leave vertically with a barrel of money or horizontally on a stretcher, but you’re definitely leaving.

Generally, my experience is that, when asked, people say they would prefer a departure be accomplished in an orderly manner that preserves the financial benefits of the business for family and heirs. And yet when pressed on what business succession plans are in place to ensure an uninterrupted transition (especially in the event of the death, disability, or departure of the owner) details are far and few between.

As it is at the outset of any business venture, planning is key to the long-term success of a business as well. The same level of planning that a business owner puts into coordinating the first few years of a business’ growth trajectory should be put into determining how and when their involvement with that business will end.

For many business owners, the thought of handing over their business to partners or family members is frightening. But without the proper planning, you could doom your business to failure! You worked hard, devoted your time and resources, and, ultimately, invested yourself in shaping your business into what it is today, so you should take the time to ensure it can live on and continue to provide economic benefits to your family.

In short, an unplanned exit will be an unprofitable one—and could lead to devastating consequences for the business as a whole.

Consequences of an Unplanned Exit

A lack of planning can ravage a small or family business, especially if unexpected tragedy befalls the owner. In the case of many family businesses, the person who owns and runs the business may have a specialized skill set that other members of the family don’t have. Further, for medical doctors, professional practices, and law firms, operation of the business is restricted to those with the necessary qualifications.

In the event the owner of data analytics company, a dentist, a lawyer, or a medical doctor, becomes disabled, falls gravely ill, or dies, the business itself could be in serious jeopardy. One must ask:

  • Who has the expertise to run the business?
  • Who is certified (i.e. legally allowed) to run the business?
  • Who will own the business?
  • Can the surviving family sell the business?

Believe it or not, all of these (and more) are questions that do not have straightforward answers unless you have properly prepared.

Business Succession in a Partnership

The issues are just as tricky when the business is owned by partners. All those hours spent building the business can go to waste if the partners fail to establish a plan in the event one of them suffers an untimely disability or death.

Should you be the surviving partner, you could find yourself struggling to keep a business afloat that is paralyzed by disputes, confusion, and disagreement as to how to move forward. Conversely, your family could be forced into litigation to gain control of your stake in the company if you are the one out of commission.

Only a comprehensive business succession plan can provide for a smooth transition to new ownership and still ensure your business continues to grow and thrive with minimal disruption.

How to Effect the Succession

A Buy-Sell Agreement is the mechanism most often used to effectuate this transition and buyout. It will lay out what happens in the event of one of the owners becomes disabled, retires, divorces, or wants to sell their interest in the business.

Typically, the Buy-Sell Agreement provides for the purchase of a deceased owner’s interest at the time of death based on a predetermined valuation mechanism. Often the buyout is funded through life insurance proceeds. What the valuation mechanism is and how the buyout is funded are critical questions to address in any Buy-Sell Agreement.

Depending on the exact mechanisms in place, having a Buy-Sell Agreement will ensure:

  1. The deceased’s family receives full value for the business interest on fair terms,
  2. The policy benefits are available quickly to buy the deceased’s stake in the business, and
  3. The buyout of the partner’s stake in the business has minimal effect on the operation of the business.

Business Succession as Part of Your Estate Plan

No business succession plan will be developed in a vacuum. It must be incorporated properly into your existing estate and asset protection plans.

When we work with business owners, doctors, dentists, professional practice owners, and lawyers on business succession arrangements, we also address the following broader issues to ensure our clients have a fully integrated estate plan:


Estate Planning

A business succession plan must be coordinated with your larger estate plan so that your assets go to whom you want, when you want. It’s equally important that business owners designate appropriate people to carry out their plans. A business succession plan may also involve Planned Gifting of business interests to your heirs or trusts.


Tax Planning

There are strategies available to those who proactively plan to mitigate taxes involved with business succession. When creating a business succession plan, we can explore ways to minimize state and federal taxes, including capital gains taxes, income taxes, estate taxes, and state inheritance taxes.


Business Formations

Formation of new business entities to facilitate the business succession arrangements is often a necessity. This is because usually a business rather than an individual will purchase business interests or stock. As such, we help clients form limited liability companies, general partnerships, limited partnerships, C corporations, and S corporations.


Agreement Drafting

Current owners of businesses, especially multi-owner businesses, can forestall future conflicts by drafting comprehensive shareholders agreements, operating agreements, and partnership agreements to govern their businesses. The execution of a new agreement provides owners peace of mind that the outgoing owner’s family will receive financial benefits and the remaining owners will be able to continue operating the business.


Buy-Sell Agreements

A properly drafted and executed Buy-Sell Agreement is a critical component of any business succession plan. It ensures that the mechanisms for valuing and funding the purchase or sale of any business interests are explicit and allows for a smooth transition process for all those involved.

Additional areas of concern include:

  • Tax-advantaged wealth accumulation
  • Effective divorce and lawsuit protection
  • Asset protection for business owners, professionals, and individuals
  • Wealth preservation and financial stability
  • Multigeneration wealth planning
  • Charitable and philanthropic planning
  • Integrated trust and estate planning
  • Tax-free inheritance planning

Your Business Succession Plan

Small business owners are the backbone of the American economy. We understand the unique financial and legal needs of business owners and others with substantial property holdings or assets. We offer expert guidance to develop comprehensive estate and wealth management plans that incorporate protections for all of your assets, including small businesses, member interests in LLCs, stock certificates, and property.

In addition to standard estate planning instruments, business owners need to take extra precautions to insulate and protect the business’s wealth, property, and assets. They also need to adopt a cohesive business succession plan that protects your business and family in the event of unforeseen circumstances and ensures you can maximize your financial return and minimize your tax liability when you transfer your business.

No matter where you are in the life cycle of your business, it’s never too early—or too late—to begin preparing for the future. Together, we can develop creative and thoughtful strategies for passing a business on to family members, business partners, or other parties. We can help take the fear and frustration out of the planning process. Call us today at (561)998-2362 or book your free Financial Legacy Review now.

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