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Succession Planning for Businesses

Succession Planning for Businesses

We have found that an increasing number of businesses do not end up surviving beyond the founding owner’s lifetime.  Most people do not take the time to ask the question “What will happen, practically, to my business should I die?”  Ownership, continuing management, licenses, trademarks, patents, what will happen to these things when the owner is no longer around?  Have they been properly considered within their estate planning?

It is important to consider Succession Planning for Businesses while dealing with Estate Planning.  If the goal is to keep the business alive beyond the founder and/or to be sure that the survivors reap the benefits of said business, then we need to consider some estate planning and business issues: Ownership, Transition and Taxes.  Size and how the company is set up are important items to understand prior to figuring out what steps to take.

In most cases, a Buy-Sell Agreement will be put into place – let’s discuss briefly/generally the three types of Buy-Sell Agreements:

  1. Cross-Purchase Agreement: This style works well in partnerships and small corporations with up to three owners.  The Agreement allows for the partners or stockholders to purchase each other’s shares at a triggering moment – death, retirement, health issues, etc.
  2. Stock-Redemption Agreement: This style works well for larger companies with four or more owners.  The Agreement allows owners to sell their shares back to the company at a triggering moment – retirement, health issues, etc.  Upon death, the estate is required to sell the owner’s shares back to the company.
  3. Wait-and-See Agreement: This is a hybrid that allows the owners to delay the selection of the two types of agreements mentioned above until the time of a triggering even.

As you can see, many of these large business issues occur upon the death of an owner and, as such, estate planning and business planning go together and must be discussed/determined prior to such triggering events.

Estate Planning is primarily deals with the business owner as an individual and should be designed to protect the owner both during his/her life as well as planning for death.

The personal estate plan will be the vehicle to transfer ownership of the business so that it does not simply die as well.

The business succession plan will be the vehicle to coordinate transfers of ownership and to determine management.  Without these considerations, the business will simply die.

Tax Implications – taxes need to be addressed with both plans and a qualified CPA should be involved as part of the team to properly plan.

While it is not always “fun” to handle these issues, it is vital to both the owner and the vitality of the business beyond the life of the owner.  The implications to avoid any planning and hope for the best is the ingredients for failure.  There is no better time to start planning then now.

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5707 Corsa Avenue Suite 104 Westlake Village, CA 91362
Mon - Fri: 9:00am - 5:00pm
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Contact Information
5707 Corsa Avenue Suite 104Westlake Village, CA 91362
Mon - Fri: 9:00 am - 6:00 pm

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