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.
Business Succession Planning
An important part of being a responsible business owner includes developing systems to help other people operate the company without you. A business succession plan clearly states who will take over specific roles, hopefully reducing any potential disputes between family members or key employees. If the business is sold after a transition event occurs, a comprehensive business succession plan will also clearly outline the sale price and purchase terms.
Four Common Business Succession Strategies :
- Leaving the business to a co-owner
- Passing it to a family member
- Transferring ownership to a key employee
- Selling to a competitor
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.
Succession: 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 in a Succession Plan
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. On the other hand, 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.
Selling to a Competitor
Depending on the type of business and ownership structure, another option is to sell your business to an outside individual or competitor in the same industry. Again, you will need to draft a buy-sell agreement. To prepare for a successful sale, you may want to have an experienced manager in place, document your operating procedures, and organize your financial reports. A buyer can more easily decide whether it makes sense to purchase the business and how to step in and take over when you have taken these steps.
Additional Succession 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.
About Skvarna Law Firm in Glendora and Upland, California
Skvarna Law Firm operates offices in Glendora and Upland, California. We provide legal services. We cover San Bernardino, Los Angeles, Orange, and Riverside Counties. This includes several cities. Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Pomona, La Verne, Montclair, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma. Visit SkvarnaLaw.com to learn more.
