Tax Tips
Small Business Succession Planning - October 2001
Richard Scrivanich - Partner
Small Business Succession Planning.
Succession planning, broadly speaking, is the creation of a plan that will provide for the transfer of a business on the death, retirement, or incapacity of an owner or a partner. Studies have shown that only about one-third of family-owned businesses are successfully passed on to the next generation. With these odds, it is vital for the small business to have a succession plan. Although having such a plan does not guarantee a successful transition to the next generation (assuming this is what is desired), it can greatly increase the odds for success.
Why transfers don't occur.
What are some of the reasons businesses do not get transferred to the second generation?
- Intra-family strife may prevent a smooth transition to the next generation.
- The owner may sell the business if an offer is too good to resist.
- The next generation may lack interest in the business.
- The estate taxes on the death of the owner may force a sale of the business.
What succession planning can do.
Succession planning, an important part of an overall estate plan, can cover the following:
- Finding a successor. The family members should discuss which members will become involved in the business when the owner or partner retires or becomes incapable of carrying it on. The use of outsiders and/or key employees capable of running the business may have to be considered.
- Insurance. An important part of estate and succession planning is to provide for insurance to cover estate taxes and/or a buy-out of a partner's share, and to help avoid a forced liquidation of the business.
- Buy-sell agreement. Such an agreement sets forth the terms under which other family members, shareholders, or partners will buy out the owner's share of the business on his or her death, incapacity, or retirement. The agreement covers how the business will be valued for purposes of the sale and where the proceeds for the buy-out will come from. (Note: The value set in the buy-sell agreement is not necessarily binding on the IRS for purposes of estate taxation).
- Providing for the worse-case scenario. What if the owner can no longer manage the business due to some physical or mental disability? Leaving this contingency unprovided for can result in chaos and unnecessary loss. A power of attorney can be used to appoint someone to take over if the need arises.
Succession planning should begin long before the owner is thinking about retirement. If you do not yet have a succession plan, now is the time to begin the process. If you have any questions concerning succession planning, or any other tax, accounting, or business matter, please feel free to give me a call at (562) 698-9891.
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