by Kim Coogan

Part 5 of a 5 part series

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.

by Kim Coogan

Part 4 of a 5 Part Series

You know you need to establish a succession plan for your business; you've identified and continue to develop individuals to whom the management, executive decision-making, and ownership of your business will pass. You recognize the importance of documenting your intentions for the future ownership of your business using a "buy-sell agreement."

Now you have to ask yourself the not-so-simple question, "If I pass away or retire and my interest is sold, how will I, or my family, be paid?" Or, "If my partner dies or wants out, how will I pay him or her, or his or her family, if I have to buy out his or her interest?" The answers to these questions will be different if the buyout occurs during lifetime as opposed to upon the death of an owner.

The buy-sell agreement should set forth the terms of payment of the purchase price, which will be determined in accordance with the valuation provisions of the agreement. In the event of the departure, retirement, disability or other lifetime buyout event of an owner, typically the agreement will allow for a promissory note evidencing the obligation to pay the purchase price over time. The term of the note may be principal and interest payments over 5, 10, or more years. The interest rate will be set at the time of the buyout, based on an index, e.g. prime rate, or the applicable federal rate, as published by a specific source. The note will most likely be secured by the pledge of the business interests being purchased.

Upon the death of an owner, the buyout may be funded either in the same manner as a lifetime buyout, or more commonly, with the proceeds from a life insurance policy on the life of the deceased owner. If the buy-sell agreement is a redemption agreement, whereby the business entity buys out the interest of the deceased owner, then the business entity will own the life insurance policies on the lives of the business owners. Upon the death of an owner, the business entity will pay out the agreed purchase price to the business owner's estate, or trust, depending on how the business interests were owned. The business interests will be transferred by the deceased owner's successor in interest to the business entity.

If the buyout is a cross purchase, then the surviving business owners will pay the agreed purchase price to the deceased owner's successor in interest. If there are two owners, then each would own a life insurance policy on the life of the other. In the case of a business with multiple owners, insurance can become more complicated. For example, with three owners, each would have to buy life insurance on two other owners. In total, there would be six life insurance policies. This can become somewhat cumbersome. An alternative might be a trusteed buy-sell agreement, whereby one life insurance policy on each of the owners is owned by an escrow agent (or "trustee"). Upon the death of an owner, the trustee collects and pays out the insurance proceeds to the deceased owner's successor in interest in exchange for the shares in the business. The escrow agent then allocates the shares among the surviving owners.

Congratulations! You've consulted with your professional advisors; you've done the hard work of considering who will carry on your vision for your business after you step away from it; you've laid the groundwork for management, leadership and ownership succession; and you've documented all of this in a well-written buy-sell agreement. You've obtained the proper life insurance or other mechanism to fund a potential buyout. You are doing great! But your work isn't done. It's a work in progress. You should revisit your business succession plan annually, and re-evaluate your management and leadership to ensure your plan is on track, and make any necessary adjustments. Your attorney, accountant, and insurance professional should work together with you to make sure your plan is the best it can be for you and your business.

by Kim Coogan

by Kim Coogan

by Kim Coogan

Part 1 of a 5 Part Series

As a business owner, you have at least a half million things to focus on at any given moment. Somewhere down the list is creating a plan for the succession of your business upon your eventual retirement or death. Who will run the business when you decide to step back? Who will succeed to the ownership of your business when you're gone? These are tough questions that need to be carefully considered, and it will likely take some time to work through and develop answers.

It can take years to develop an organization that is well-situated to carry on the business effectively, after you- the founder, the visionary, the source of the elbow grease that has built the business into the successful entity it is today-decide it is time to enjoy the fruits of your labor by pursuing other meaningful endeavors that perhaps have had to take a back burner while you ran the business.

Some of the key issues involved in business succession planning are:

• Transition of day-to-day management of operations to knowledgeable, key personnel in the organization;
  
• Transition of executive decision-making power to one or more competent, decisive leaders who will navigate through short- and long-term changes in the business, industry marketplace, and economy;
  
• Transfer of ownership, both control and economic value, to key employees, next generation of family members, or a third party.
  

Family business owners have the additional challenge of determining whether members of the next generation have the skills and inclination to continue the business successfully. Sharing common genes does not necessarily mean sharing the same interests, aptitudes and vision.

In a perfect world, you would be assured the luxury of time to map out and execute your business succession plan. Whether you decide that the best solution is an outright sale to a third party, or transition of the business to certain employees or family members, you will need time to implement your plan. The groundwork necessary to accomplish this should be laid over several years prior to your anticipated exit date. This will make the transition of the business as successful, tax-efficient, and seamless as possible. Planning ahead will also maximize the potential return to your family from the many years of sweat equity you have invested to make it the successful business it is today.

Since our world isn't always perfect, until the business transition is complete, you should have an emergency plan that may be implemented in the event of an unforeseen event such as your untimely death or disability. Your emergency plan should be communicated to your trusted advisors, giving them guidance as to how to proceed to assist your family and key employees with the business transition in such a situation.

The most important step is the first one-contacting an attorney to start the business succession planning discussion. Your attorney and other business advisors will be able to listen to your goals and concerns, and present you with options for your succession plan. It may take some time for your ideas to take shape, but taking the time to contemplate the future of your business after your departure will be well worth it in the long run.