Passing the Torch: Smart Business Succession Strategies

For many business owners, their business is one of the most valuable and important things they own. When it is time to sit down and create an estate plan, it is critical that business owners plan for their business just as they would plan for their home or finances.

Effective business succession planning ensures a seamless transition of ownership upon the potential occurrence of many different events, such as the business’s owner’s retirement, disability, or death. All businesses need a succession plan, but many business owners overlook it.

A business succession plan clearly states who will take over specific roles, hopefully reducing any potential disputes between family members or key employees. Whether you are a sole proprietor or a business with multiple employees, understanding your options is crucial for making informed decisions that align with your business goals and desired family legacy.

Leaving Your Business to a Co-owner:

Co-owners or partners can play an important role when you plan for anticipated or unexpected changes in the future. Selling to a person who is already involved in daily operations and committed to your company may be an easy way to ensure ongoing success. You can draft a buy-sell agreement for the co-owner that addresses different scenarios, such as a gradual sale for retirement or a quick transfer in a medical emergency or upon death.

Passing Your Business to a Family Member:

Selling or transferring your business ownership to a child, grandchild, sibling, or other family member allows you to keep your business in your family. This is a great option if your children or other family members are already working for you. There are estate planning strategies available that may help lower your tax liability by transferring some of your business as a gift using your lifetime federal gift tax exemption. Federal gift taxes on amounts exceeding the exemption will apply, but once you transfer ownership, the ownership interest is no longer part of your estate.

Transferring Ownership to a Key Employee:

Selling an ownership interest to a trusted employee ensures that the business is run by someone who appreciates it and is familiar with the daily operations. Selling to a key employee also requires a buy-sell agreement to purchase your business at a predetermined retirement date or in the event of death or disability.

If the employee does not have the funds available, you may consider seller financing, that is, lending money for the sale with a promissory note and allowing them to pay you back directly. Not only does the purchaser benefit from the opportunity to own your business, but you (or your family in the event of your death) also receive a steady stream of income from the principal and interest for the agreed-upon period. In the buy-sell agreement, you would establish a down payment amount and monthly payments with interest until the purchase is paid in full.

Additional Considerations:

Estate planning is about planning for what will happen while you are alive but unable to make your own decisions as well as planning for when you have passed away. Be prepared for the unexpected by starting your business succession planning as early as possible. The decisions you make today while building and operating your business can affect your options to sell it later.

We are here to help you develop the best estate plan that properly addresses the valuable things you own, including your business. If you already have an estate plan, it is important to review it periodically to make sure that it is up to date. Give us a call at (405) 928-4075 to schedule your appointment today.