Just like many business owners who are “too busy with their businesses” to think about planning for its succession, I am guilty of getting 80% through the process of writing this series on business succession planning, and then putting aside the task of writing the final chapter, while I was busy attending to my clients’ needs. Part 1 of this series emphasized the importance of starting the process of business succession planning well in advance of your anticipated exit date, since the transition of both ownership and management will ideally take place over an extended period of time. In Part 1 I suggested having an emergency plan in place, in the event your timeline doesn’t roll out exactly as you would have hoped. Part 2 raised the issue of identifying not only those who will own the business, but also those, who may not be the future owners, who will manage the day-to-day operations, as well as continue to develop the company’s long-term strategy and guide the future direction of the business. Part 3 discussed entering into a written buy-sell agreement among the owners, which memorializes the terms under which ownership interests may be transferred, whether by sale, upon death, or otherwise. Part 4 laid out various options for funding the buy-out of an ownership interest.
A business owner may decide that once he or she has made it through steps 1 through 4, they can put their shiny new plan on the shelf, and go back to what they would rather be doing, i.e., running the business. But it is important to pull out the business succession plan on a regular basis-perhaps annually-to determine whether changes have occurred such that the plan that made sense last year may need to be adjusted this year. You may have a clearer perspective as to how those individuals you had identified as successor owners and/or managers or directors are performing. You may have had a change in health or lifestyle that precipitates the need to accelerate your timeline for the business transition.
Using time to your advantage is a key to a successful business succession plan. If you plan to transfer ownership to family members, you want to do so in a tax efficient manner, perhaps taking advantage of annual gift tax exclusions, or your lifetime gift and estate tax exclusion. There are many options available to get a bit more “bang for your buck” from your gift tax exclusions. Transferring non-voting and/or minority business interests enables you to take a discount on the value of the transferred interest, as reported to the IRS on a gift tax return. Engaging in systematic annual gifting over many years not only gives you the opportunity to maximize use of your annual gift tax exclusions, but also gives you a chance to see whether your original plan remains in line with your intentions year after year, or if adjustments to your future gifting may be desired.
On the other hand, perhaps you’re ready to transfer a larger portion of the ownership interest. A gift to a grantor retained annuity trust might make sense if you prefer a method that uses very little or none of your gift tax exclusion. Or you may consider an installment sale of a portion or all of the business to a grantor trust for your family members, enabling you to defer, or perhaps eliminate, the capital gain you might otherwise have to recognize and take into income as a result of a sale transaction. If you’ve concluded that the best succession plan is to sell while you’re still in control of the business, then an outright sale of the business might be more appropriate. The process of hiring the right broker, and locating the right buyer, willing to pay the right price, can take considerable time and patience.
Regardless of which method of ownership and management transition of your business best fits your situation, I know one thing for sure, without even having met you yet-you need to start now, or if you’ve started, you need to continue, to develop a business succession plan. Gather your team of professional advisors, and get the ball rolling. Whether you plan to work forever, or are dreaming of days on the golf course or beach in the not-so-distant future, you’ll rest easier knowing your succession plan is in place for a smooth business transition whenever the time comes.