Business Succession Planning

CPA services provided by Contryman Associates, P.C., Investment Adviser services are offered through Contryman Wealth Advisors

A succession plan is a comprehensive plan for transitioning a business, its owner, and the owner’s family from the current ownership and management to one in which the owner is no longer involved.

Like most people, business owners are usually concerned about their own financial security, providing for their families, and keeping their families happy. However, closely held business owners often have the additional concern of keeping the business successful after they are no longer running it, since they or their family members often depend on the business to provide continuing financial resources. Even if the owner or their family members are not financially tied to the business after transferring ownership, the owner may have personal reasons for wanting the business to continue to succeed. A sound succession plan addresses the goals that business owners have for themselves and their families. It can also enhance the value of the business by making it less dependent on the talents of the owner. This allows the owner to transfer the ownership of the business without it declining in value as a result of the transfer.

A sound succession plan should address:

  • Converting business wealth to assets that can be used to fund the owner’s retirement.
  • Transferring ownership in the business to the desired successors.
  • Treating the owner’s children equitably while considering how to divide ownership between those who are active in the business and those who are not.
  • Addressing estate planning concerns associated with the transfer of a closely held business, including minimizing estate and gift taxes, providing liquidity to the estate, and planning for a surviving spouse.
  • Strategic planning for the success of the business after the transition, with primary focus on choosing and grooming a management successor to successfully run the business.

Financial Security in Retirement
Some business owners anticipate and plan for their retirement. Others cannot envision life without the business and have no intention of retiring. Even those with no intention of retiring must realistically acknowledge that circumstances beyond their control may force them to stop working at some point. An exit strategy ensures that the owner and his family will be able to withdraw adequate financial resources from the business at the owner’s retirement, whether voluntarily or not.

The amount of financial resources available to the owner or his family when the owner is no longer working will be limited by the value of the business. Planning for ownership and management succession actually enhances value because planning minimizes potentially costly disruptions that can take place when the transition happens without preparation.

Providing for Dependents
Most owners are concerned about providing security for their spouse and children during their life and after their death. A closely held business often represents the owner’s most significant asset. Planning for transfer of ownership and management control can ensure that the value of that asset is preserved for the owner’s dependents.

A sound succession plan minimizes estate taxes on the business and provides liquidity to the owner’s estate. In addition, the succession plan can be structured to minimize income taxes on business income or the eventual sale of the business. Both measures preserve cash resources and enhance the financial security of the owner’s dependents.

Ensuring the Continued Success of the Business
A closely held business is usually more than a way for the owner to make a living. A business often gives the owner power and prestige in the community. It can also represent the owner’s legacy to his children both financially and in terms of family identity. Additionally, owners often have strong loyalties to employees and customers with whom they have worked for many years. Thus, ensuring the business’s continued success is often a very high priority for the owner.

Planning for transitioning management responsibility is critical to the survival of the business after the owner retires or dies and is integral to any succession plan. Planning for management succession ensures that the owner’s death or retirement will not disrupt business operations, as the management successor is prepared to step in immediately and make business decisions. Also, sound planning for management succession includes introducing the potential management successor to key third parties such as customers, suppliers, and bankers. This enhances those parties’ confidence in the management successor and allows him to carry on “business as usual” rather than having to prove himself.

Having a buy/sell agreement is another important way of ensuring that an owner’s departure does not adversely affect the business. Without such an agreement in place, the departing owner may transfer his interest to someone who is not qualified to replace him (e.g., a surviving spouse or child). Giving an inexperienced or unqualified individual a significant ownership can cause serious business disruption. Likewise, a buy/sell agreement typically sets a price at which the departing owner’s interest is to be purchased. This can avoid having the remaining owners spend a great deal of time and energy negotiating with the selling owner (or his estate) over the purchase price.

Finally, a sound succession plan balances the needs of the business with those of the owner, which helps ensure that the business is not adversely affected by actions designed to benefit the owner. For example, plans for the owner to withdraw cash after retirement are evaluated not only on whether the withdrawals satisfy the owner’s liquidity needs, but also on their impact on future business operations. This helps ensure the continued viability of the business after the owner’s departure.

Promoting Family Harmony
Succession planning involves communicating with each family member his or her place in the business. Transitioning management responsibility and ownership in a business may cause the owner to make some painful choices. However, a planned transfer also forces an owner and his family members to discuss their goals with respect to the business. Communicating these goals to each other ahead of time is ultimately much less painful to family members than spending a lifetime hoping their parents’ plans for them in the business match their own. Without succession planning, family members often find out about the owner’s plans for management and ownership succession after he is dead and has no chance to explain his actions, which can be devastating.

When the owner has multiple children, especially if some are active in the business and some are not, planning to transfer ownership in the business can avoid pitting the active children against the inactive children. Solutions such as using life insurance to create an asset for the inactive children or to create buy-out funds for the active children are available to meet the owner’s goal of transferring wealth equitably without creating family conflicts.

Succession planning may also include devising ways for family members to work together for the good of the business. Although every family member might not be chosen for his or her first choice position, all can be given an opportunity to work and to voice an opinion. Formalizing this process can be helpful, especially when tensions exist between family members. Sometimes creating a family council to make important decisions about the direction of the business strengthens the family identity and provides family members an opportunity to work together toward a common goal, which often translates to increased family harmony.

Your Succession Planning Team
Because succession planning addresses a broad range of issues, a team of professionals is usually involved. At a minimum, an accountant and an attorney are typically involved. The CPA often has a thorough knowledge of the business and sometimes the family, plus he/she is usually a very trusted advisor. When outside capital is needed to fund the ownership transfer, a banker or other financial advisor often assists in locating and obtaining funds. If business interests are gifted or sold to related parties, a valuation expert will usually be needed to substantiate the property’s fair market value. An insurance professional may also be involved. Finally, in some situations, family business consultants or counselors can help family members deal with tension and conflicts that arise as business ownership and management responsibility are transferred from the current owner.

Clearly, no single professional will be able to provide all the services needed to develop most succession plans. A team approach is usually necessary and often beneficial due to the depth of the experience and knowledge brought to the table.

Plan Now!
The sooner you begin planning for the management and ownership succession for your closely held business, the more options we have for assuring that your goals are achieved. Call your Contryman professional today to begin planning for this inevitable change.

Meet with your Contryman professional to discuss your goals for transitioning your business ownership and management and determine if a succession plan is needed. We will discuss your plans and wishes:

  • Your vision, goals, and objectives for the business
  • Your personal retirement goals and cash flow needs
  • The importance of family involvement in ownership and management of the business
  • Successors you have identified for your business – both owners and management positions
  • Active and non-active roles for family members – We will meet with other family members who may be involved in the business to determine the goals of those family members.
  • Training that will be needed for successors
  • Role in the business of retiring owner/managers, if applicable
  • Other professionals we should involve in your succession plan team

Other Succession Planning issues we will address:

  • Estate Planning Issues
    • Taxation implications to the owner/business upon transfer or sale of business
    • Does your estate have enough liquidity to pay estate taxes?
    • Would a buy-sell agreement be beneficial?
    • Provide estate and financial plan for owner, spouse, and succeeding generation
    • Address equity of active vs. non-active family members
  • Transfer of the Holdings
    • Method of transfer
    • If property is sold, financing of sale
    • If property is sold, determine if after-tax cash flow is sufficient to support debt and interest
    • Tax strategies and implications
    • Legal implications
    • Business structure options
    • Business agreements
    • Business insurance needs
  • Contingency Issues
    • Identify potential problem areas
    • Dispute/conflict resolution mechanisms considered and included in business agreements
    • Disability contingencies and possible insurance
  • Business Valuation
    • Determine fair market value of the business
  • Exit Strategy
    • Determine method of transfer
    • Establish a timeline for implementation of the succession plan
    • Provide the written plan to all involved so they are aware
    • Communicate regularly with affected parties
    • Regularly follow up and update the plan as necessary


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