Are you ready for the next phase of your life? Are you prepared to sell your business, retire or change careers? Would you like to capture the value of all your previous efforts in developing, improving and maintaining your business? If so, then you’ll need a written succession plan.
A business succession plan is extremely important for both the departing executive and the business. The plan gives the executive an “exit strategy” in accordance with her or his wishes, but also opens the door for the company’s future leaders. This should not be a sudden event; it should be carefully planned far in advance.
Key employees need training and leadership skill development. They need to acquire the executive’s institutional knowledge and see opportunities for advancement. Without promotion opportunities they may leave the organization and the executive may be called back for further service. Worse, business continuity may be lost as the organization struggles to find new leadership.
A business succession plan is simply an expression of the decisions you’ve made concerning how you’ll transition your business. Will you sell it? Give it to a family member? Liquidate the assets and close the doors? A succession plan provides a roadmap and a timetable to follow in order to accomplish your goals.
Your succession plan will illustrate how you’ll maximize your return on your business, whether it will be from a sale of assets or sale of business interests (e.g. stock or LLC membership interests). You may wish to have a continuing income stream or stay on in some limited role, for example as an employee or consultant.
You can improve your chances of succeeding with your plan if you use a team approach, soliciting the views and perspectives of a select group of advisors. Your team may consist of close family members such as your spouse and children, but should also include your accountant, your attorney and your financial advisor. Your financial advisor can assist you with preserving and protecting the proceeds from a sale to secure your future needs and perhaps preserve a legacy for your heirs.
How do you determine the value of your business? It will be helpful for you to discuss an estimate of value with your accountant. For large or complex businesses you may wish to consider the services of a valuation expert, such as a Certified Valuation Analyst and possibly an appraiser. These advisors can help you locate sales information for comparable businesses.
You’ll also need to consider the net of tax value of your business, since Uncle Sam will relish the fact that you’re selling your business. Your accountant can help you research this information, including projections at various sales levels, which you’ll need before you begin negotiating a sales price.
Pat Herman
Senior tax attorney at Woods Rogers Vandeventer Black
Here are some additional things to consider when starting the succession planning process:
• Does your business include real estate? If so, should you keep the real estate and lease it to the new owner?
• Are family members involved? If you’re selling or bequeathing the business to family members, are they sufficiently prepared to assume the responsibilities? Will they need continued guidance? What will be your role and how can you avoid the resentment that sometimes comes when “Mom and Dad are hanging around the business telling us what to do”? If one child is involved in the business and the others are not, does this require changes to your estate plans to equalize their gifts?
• You might want income from the business to be shared with the children who are not involved. Then perhaps you need to have different forms of ownership such as voting shares or interests for the children involved in the business and non-voting shares or interests for the others. Children who are working in the business can also receive a salary as compensation for their efforts.
• Might there be estate tax concerns? While the credit limit (the applicable exclusion amount) is very high now ($12,920,000 per person for 2023, and projected to be $13,610,000 for 2024), under current law these numbers are expected to decrease in 2026 within an estimated range of $6.5 million to $7 million each. If you currently have or may have estate tax issues in the near future it’s critical that you discuss options for minimizing the estate tax burden on your family before entering into negotiations to sell or transfer your business. You don’t want to miss any opportunity to preserve the value of your business for you, and for your family’s future.
• When do you need to begin the succession planning process? It is extremely important to do your business succession planning now. You may be faced with an untimely life event such as death, disability or some future medical event. You want to be the one creating your succession plan. You don’t want to burden your family members and employees with this huge responsibility. Failing to plan early enough could likely result in a reduction in the value of your business. Without proper planning, your absence will reduce the stability and “going concern value” of your business.
• What do you need to include in your plan? A well-thought-out plan will include an identification of future owners such as family members, outsiders or potential buyers, future managers and expected key employees; a valuation of the business; a timetable for implementation (for example, starting with an estimated date of retirement); and the steps that will be necessary to put your plan in place. These steps may include seeking advice of your team of advisors, preparing an inventory of the assets, marketing the business, preparation of necessary legal documents such as confidentiality agreements, an asset sale agreement, assignments and possibly inspection reports. The nature of your business may dictate other requirements, such as seeking approval from lenders for a transition.
A well-considered and completed business succession plan will provide you with great comfort. You’ll know that you have taken the proper steps to preserve and protect your business. Your family members and employees will be appreciative. Don’t worry if situations alter or you change your goals. A business succession plan is flexible and can be modified.
