Succession Planning

Business succession planning is the establishment of a plan to provide for the orderly transfer of the management and ownership of a business to avoid taxes and litigation to ensure the family or control person’s objectives.  Many of the considerations are similar for family businesses and for non-family businesses.  The general purpose is to provide for continuity of the business and transfer an apportionment of assets to the next control group.

The liquidity needs of the owner must be considered and the timing and manner of the transfer determined.  The owner can do any of the following:  sell the assets, sell the stock, do a tax free merger, do a tax free division, sale to an ESOP, sale to employees, sale to family members, sale to grantor trusts, transfer equity interests to a grantor retained annuity trust (GRAT), leave the interest by will to family members or liquidate the business, including bankruptcy.  Each of these options has unique aspects and should be examined in the specific situation of each business.

Taxation is a large consideration in the structure and each of the above options has different tax treatments.  One provision is §6166 of the tax code provides that an estate tax attributable to closely held businesses may be paid in over two to ten equal installments.  Life insurance may also be used in business succession planning to provide liquidity.

This requires a definitive plan, not just a hope.  Information needs to be gathered, advisors selected and discussions with family members completed.  Valuation of the business is at the core of any plan.  Estate planning documents need to be reviewed.  The family needs to agree on the concepts of business succession planning and the difference between management and ownership with the goals of all parties considered.  Exit strategies of the family should be considered and a suggested plan discussed.  The owners will also have to consider the cash needs of the business during this process.  A list should be established of all documents needed to carry out the plan and an annual review should be put in place to analyze the plan and make any changes necessary.