As the owner of a small or family-held business, you understand how important planning is to your company’s growth and success. That is why you regularly prepare budgets, craft strategies, and make investments designed to best position you for prosperity in the quarters and years ahead. You probably also know that if you do your job right, your business may outlast your active role in it (or your active role on earth). That is why you understand the critical importance of business succession planning.
Intuitively, you know that the lack of a clear and comprehensive succession plan can have devastating consequences for your small business, especially when you retire or want to sell your company. You know that you should address these issues now because chaos and conflict will ensue, and continuity will be hard to maintain if you pass away suddenly or become incapacitated by an unexpected tragedy. After all, that is why you’ve already prepared a comprehensive estate plan for your family.
But knowing that business succession planning is important and actually doing something about it are two different things.
Succession Planning Is a Big Blind Spot for Otherwise Visionary Leaders
If you haven’t crafted a succession plan, you have plenty of company. PwC’s 2019 US Family Business Survey revealed that only 23 percent of family-held business owners reported having a formal, written business succession plan in place.
Given how much of their business and personal fortunes depend on succession planning, how could it be so many smart, driven, and forward-thinking entrepreneurs have this huge blind spot? It’s for the same reason that so many otherwise successful and sophisticated people don’t have an estate plan: it’s hard to think about being gone and leaving everything behind, whether it is the family you love or the company that you’ve built with your own two hands.
Integrating Estate Planning and Business Succession Strategies
But that is what makes business succession planning such a valuable investment of your time: it is a way to protect your business, your loved ones, and your retirement all at once. By crafting and implementing holistic plans that integrate your succession and estate planning strategies, you can minimize your tax liabilities and maximize the value of assets you pass on to your heirs. You can put your business on a stable path and avoid disruption after you pass away or relinquish ownership and control.
For example, to maintain control of your business but pass ownership to some or all of your children, your estate plan can include lifetime gifting strategies that transfer your interest in the company while you are still alive. By doing so, you allow future appreciation in the value of the company to accumulate outside of your estate while also helping you and your children avoid taxes on any appreciation in value after the transfer date.
Similarly, your estate plan can include a specialized trust designed to accomplish those same goals. With a Grantor Retained Annuity Trust (GRAT), you retain your interest in the business before passing it to the beneficiaries of the trust. Besides tax benefits, a GRAT allows you to keep the transfer private and can protect your business against creditor claims.
These are just two of several ways your estate plan and succession plan can work together to accomplish a wide range of objectives.
The Questions Your Business Succession Plan Can Answer
The strategies and vehicles you use in your succession and estate plans will vary depending on your personal and business goals, the size and complexity of your asset portfolio, and your family dynamics, among other factors. But whatever the specifics, your business succession plans should answer the same fundamental questions that you and every small business owner without a plan should ask themselves:
- Does my company have a written Operating Agreement, Shareholder Agreement, or Buy-Sell Agreement that addresses how ownership interests can or will be sold or transferred?
- Have I identified, prepared, and named a successor who can take the reins if something happened to me tomorrow?
- Do I have a plan for ownership, control, and governance of the business in my absence?
- Is there a document that clearly delineates the roles and responsibilities of shareholders or members?
- Is there enough liquidity in my company to avoid a forced sale?
- Am I relying upon my interest in the company to meet my personal cash flow needs for retirement, and if so, how will I ensure that I have sufficient income for those needs?
No Time Like Today to Get Your Business Ready for Tomorrow
With business succession planning, there is no time like the present, especially if you have already given thought to handing over the reins or retirement is on the horizon. The legal, tax, family, and financial implications of a turnover in ownership and leadership can be overwhelming, and it can take some time to strategize and work through all of the details of your plan with your business succession planning lawyer.
But by starting today, you can ensure that your business and family are ready for whatever tomorrow brings. To get going on your business succession plan, please contact one of Kreis Enderle’s estate planning attorneys today.