A business succession plan is a critical tool for securing long-term business success, defining how ownership and management will transition when a key leader or owner exits the company. This planning is integral to estate and financial planning, ensuring seamless operations and a structured path for future leadership.
As an advisor, here’s a quick overview to understanding succession planning basics and navigating potential challenges that may occur.
Partner Buyout Scenarios:
In businesses with multiple partners, a common succession strategy involves the surviving partners buying out the portion of the business owned by a departing or deceased partner. However, liquidity can often become a problem in these cases. Life insurance policies are one of the most effective ways to avoid liquidity issues.
Employee Succession Plans:
For sole owners in particular, one option is to transfer ownership to trusted key employees. The owner can begin this transfer while still alive, often through employee compensation or bonus packages. For example, an owner may implement an Employee Stock Ownership Plan (ESOP), which allows employees to earn business shares over time, providing an incentive for employees to stay with the company long-term.
Family Succession Plans:
Transferring a business to family members is perhaps the most common but challenging type of succession plan. Parents often want to pass on the business to their children fairly, but equal is not always fair. If one child is actively involved in the business while others are not, leaving the disengaged children equal ownership can lead to conflict and operational challenges.
One strategy is for the parents to sell the company to the involved child in exchange for a promissory note payable over a period of years. The promissory note essentially freezes the company’s value as a part of the parent’s estate so that at their death, the uninvolved children will inherit an equal share of the value their parents built prior to the sale. Meanwhile, having ownership of the company allows the active child to reap the benefit of any additional growth he or she creates thereafter.
However, emotional and financial dynamics can complicate family succession plans, so it may be wise to consider third-party options.
Navigating Business Succession Planning:
A carefully thought-out business succession plan is an important investment in a company’s long-term success, ensuring thriving operations for years to come. Developing a business succession plan is a highly personal process and should reflect the unique preferences and finances of the individual business owner.
We are happy to help guide you or your clients through the business succession planning process to help create a plan that aligns with their values and goals. Our team at Cook Tillman Law Group can be reached through our website and by phone at (615) 370-2444. Don't hesitate to contact us with questions or concerns regarding estate planning matters.