The Fundamentals of Business Succession Planning
Unlike an individual, a business is an entity that can continue to thrive even after the founding members that established the business are no longer there. This is possible with well-considered and legally sound business succession planning. Having a solid succession plan well in advance can help in maximizing the value of your business when the right time comes. Closely held businesses should consider the following fundamentals for their succession plan.
Key Elements in Business Succession Planning
You should never plan by crisis. Several businesses have been forced to sell at a low price or simply shut down shop because they never planned for the contingent event that their business may end someday. Planning for the death, incapacity, and sickness of the primary owner is necessary. You need to plan in advance if you want to reap the benefits of your business.
You need to decide the long-term goals for your business. Do you want to retain the business in your family or sell it to a competitor? Do you want investors or are you planning on never selling it? These scenarios can help you organize your goals and business. You will be able to attract the most likely successor this way.
Most owners of closely held businesses want to pass the ownership within the family. In most cases, this is not a viable option. 70% of family businesses fail by the time the business lands in the hands of the third generation.
You can reduce the risks with a proper advance plan if you want family succession. The two major steps of facilitating maximum estate planning effectiveness are providing for all family members to be treated equitably and providing an adequate retirement income for the owner.
The best option in most cases is to sell the business. Maximizing the business value is paramount if you select this option. You should bring your business to the right condition if you want to sell at a maximum price. You should also find an optimal time to make the sale. This may vary depending on inflation, interest rates, and economic outlook. It can take tremendous organization and years to maximize the value of a business.
Plan for Uncertain Federal Estate Tax
There is a long-standing joke that the only certainty regarding estate tax is that it is uncertain. Rules change with each change in the White House and Congress. In addition, states impose their estate taxes as well. You need to carefully monitor the political, economic, and legal climate. Your family may not be left with any other option than to sell the business to meet the estate tax cash call if you don’t plan for estate liquidity properly.
Coordinating Estate and Financial Plans
You may not have enough cash for funding your objectives if your estate and financial plans are not carefully coordinated. The estate plan should provide liquidity for business debts and estate taxes while meeting all people-planning objectives. You can fund such money concerns through life insurance if owned in the proper manner, type, and amount.
Enter a Business Buy-Sell Agreement
A buy-sell agreement is a lifetime contract that provides for the transfer of all or a portion of business interests if one or more events occur. These trigger events are defined in the contract as well. Common triggering events are death, disability, and retirement of the business owner. Interest in the form of a business entity can be transferred through this type of agreement.
Benefits of Business Succession Planning
A business succession plan, in simple words, is an estate plan for the business. It contains written agreements detailing what happens when an owner becomes incapacitated, leaves the company, or dies. The business succession plan accounts for estate and tax planning consequences for the departing owner.
This type of planning is important for closely held family businesses where the vision and guidance of founders determine the success of a business. Such businesses generally cannot survive or succeed without a plan. The most important benefit is the peace of mind it brings. You can be sure that your life’s work will continue even when you are no longer in charge.
Speak With a Business Law Attorney in Alabama Today
Business succession planning is not only vital but also necessary. The qualified and experienced attorneys at the BHM Law Group can help you draft a business succession plan and draw up a buy-sell agreement after determining the end goals. We are happy to provide you with a free initial case evaluation. Call us at (205) 994-0902 or complete this online contact form.