Business succession planning is the process of determining how you are going to transfer your business ownership and transition out of a business management role while maximizing your personal financial security. It is a critical process that determines whether the transition of a business succeeds or fails. This entails a series of logistical and financial decisions that will prove to determine the fate of business succession.
Why Should Small Businesses Worry About Succession Planning?
There are several reasons:
- Unexpected events, such as death or disability of you or a business partner. Normally, business succession planning is implemented in view of a predetermined retirement date. However, the chances that there could be an occurrence of unexpected events makes the process more important and urgent.
- Poor business transition can have negative effects on business results. Consequently, failure of business could occur.
- The value of your business may represent a substantial source of income in your retirement. Therefore, it is important that efforts are made to implement successful succession planning. You could minimize risks to your retirement capital that way.
- If you wish to transfer your business to a family member, you will likely need to coordinate your business plan with your estate plan. You will also want to explore any tax deferral opportunities that could benefit you and other family members.
Types of Business Succession Plan
Various options exist for small business owners to explore if they desire to implement a succession plan. An experienced succession planning lawyer can help you move forward with these options.
Selling Your Business to a Co-owner
If you founded your business with a partner or partners, you may be considering your co-owners as potential successors. A buy-sell agreement could be implemented in this case.
Passing Your Business onto an Heir
This is a popular option for business owners, especially those with children or family members working in their organization. It’s seen as an attractive option even though most second-generation businesses hardly survive business transition. Lifetime transfer strategies could be implemented in this case.
Selling Your Business to a Key Employee
This is selling your business to someone that works within the organization. Most times, employees in the organization don’t have the financial capacity to buy the organization they work in. Seller financing could be implemented in this case.
Selling Your Business to an Outside Party
This is looking elsewhere other than your family members, partners or employees for potential successors. Entrepreneurs or even your competitors could be the outside party.
Selling Your Shares Back to the Company Upon Death
This is an option available only to businesses with multiple owners. An “entity purchase plan” or a “stock redemption plan” is an arrangement where the business purchases life insurance on each of the co-owners. When one owner dies, the business uses the life insurance proceeds to purchase the business interest from the deceased owner’s estate. This gives each surviving owner a larger share of the business.
Why You Need a Succession Planning Attorney
The success of succession planning hinges on both financial and legal factors. It involves a lot of details revolving around:
- The timing of the transfer and how interests will be held.
- Determination of who will succeed in ownership and management.
- Transfer tax and income tax considerations.
- Provisions for family members who are not active in the business.
The input of an attorney specializing in business succession planning is critical to your business’s success. An experienced attorney will be an invaluable asset as you navigate the legal factors involved in succession planning. You don’t have to worry about drafting contracts and agreements if you hire a qualified attorney to do this for you. An attorney plays a key role by drafting a buy-sell agreement, creating matrimonial agreements, creating trusts, and restricting corporate capital. The need for an attorney by small businesses when planning a business succession is a matter of extreme importance and urgency.
To learn more about succession planning, visit us here. Lonich Patton Ehrlich Policastri is a leading law firm in the area of business succession planning. They offer free consultations to anyone within the following areas: Santa Clara, San Mateo, Contra Costa, Santa Cruz, Monterey, San Jose, and San Benito.Contact them today and successfully implement succession planning for your business.