Successful Business Succession: A Key to Preserving and Passing on Wealth

The day-to-day fight for survival often consumes much of a small business owner's time and energy. Little is left over for thoughts of retirement and plans for passing the business on to another. However, a sound business succession plan is crucial to preserving a business owner's life's work and wealth.

Every day brings a business owner closer to the time when they hand over the business to an heir, spouse, partner, or other person or entity. As with almost all successful business ventures, planning is key to proper execution of succession.

First Step

The first step in creating a business succession plan is to choose the successor. Sometimes the choice is obvious, and sometimes there's a pool of possible successors to choose from, not all of whom can be pleased with the choice.

Some business owners will for a variety of reasons choose to simply cash out the business in lieu of handing it off to a following generation, selling the firm and later passing on those acquired assets.

In some family businesses, heirs might not want to take over management of the firm, though they might well want to retain equity in the company. A number of considerations come into play here, best discussed with an estate planning attorney as part of creating a succession strategy: Should heirs get equal shares, though some might not be interested in management? Should non-working heirs get smaller shares than those who shoulder management responsibilities? Should the shares should be pooled together in a voting trust so that the heirs get the benefit of having their voices heard, the experience of being involved, and also the power from acting together?

Regardless of the answers to those questions, before selling or transferring ownership of a business, an appraisal should be carried out - preferably by an experienced, certified business valuation expert. An informal valuation may be obtained from some certified public accountants.

A Common Transfer Vehicle: Life Insurance

After the value of the business has been determined, life insurance can be purchased for business partners. In case of death, the benefits are used to buy out the deceased partner's share for distribution among remaining partners.

With a cross-purchase agreement, partners buy life insurance, listing each other as beneficiaries. When one partner dies, the others get that partner's share of the firm.

With an entity-purchase agreement, the company itself purchases a life insurance policy on each partner. When a partner dies, the business uses the policy benefits to purchase the deceased's share of the firm.

In this way, the business absorbs the costs of the transfer.

Points in Favor of Prudent Planning

There are sound personal and business reasons for sitting down with an estate planning lawyer and constructing a clear plan for passing on a business to partners or heirs.

  • Management: an estate plan can clarify who will manage the business in order to avoid a period in which the phones are ringing from potential customers, but there is no manager and the employees are leaving.
  • Taxes: an estate planning attorney helps clients pass assets on so that estate and other taxes are minimized and assets protected
  • Agreeable price: businesses are fluid, and a common approach is to agree on the method of valuing the business. Alternatively, by settling on a price beforehand, it eliminates a lengthy valuation process after the death of an owner or partner.
  • Life insurance benefits: these can be immediately available to pay for the deceased's share of the company, typically preventing a cash-flow crisis necessitating a quick sale of the business
  • Timeliness: a business succession plan allows for the timely settlement of the estate, avoiding costly litigation and helping ensure the continuity and success of the company

Successful Succession

Business owners do themselves, their partners and their families an enormous act of kindness by helping them avoid divisive in-fighting or litigation when the time arrives for the business to change hands.

An Arizona estate planning attorney with business law and corporate governance experience can help define succession goals and create a plan to effectively achieve those goals so that a business survives and thrives after succession.