HBO’s new hit show, “Succession,” follows the lives of the fictional Roy family, owners of a global media and hospitality empire. The show depicts the declining health of the family’s patriarch, Logan Roy, and the fight for control that takes place between the family’s other members. While the show is fictional, the reality is that succession planning is an important aspect of estate planning that should be fully integrated into your plan, especially for business owners. A solid estate plan not only provides for the disposition of your assets upon your passing but also plans for someone to take your place (a successor) when you are no longer able to perform your responsibilities due to incapacity or death.
Below are some common areas that should be given thought as part of your estate planning.
Business Succession Planning
If you own your business, then you provide for not only yourself, but also your family and your employees. Succession planning is critical for business owners to ensure continuity of the business in your absence. The vast majority of businesses operating in the United States are family owned and represent that family’s largest financial asset. Without a plan in place, the business that you spent considerable time and effort building will likely disintegrate in little to no time without you. Assigning shares or membership interests in your company to a trust may be advisable so that the ownership of your business easily passes to your successor upon your passing. Additionally, without some type of succession planning your ownership interest in the business will most likely be subject to a probate proceeding through the courts.
Creating A Business Succession Plan
The first step in creating any plan is identifying and articulating your goals by thinking ahead and asking important questions. Common goals for business owners include:
- Retirement planning. How do you want to live out your days? What lifestyle do you want to maintain during retirement?
- Maximizing business valuation. What is your company worth? How can you grow your company to maximize profit?
- Ensuring a smooth transition upon retirement. Who can best run your business when you retire? Should ownership and management be entrusted to the same individual?
- Tax avoidance. How can you minimize the amount that you pay the government on the transfer of your company?
- Probate avoidance. How can you avoid a costly public proceeding?
For estate planning professionals, assisting clients in minimizing taxes and avoiding probate are paramount. There are many tax avoidance and probate avoidance methods available depending on the size, structure, and nature of the business. For example, if a business is expected to experience rapid growth, it may be worth considering transferring the business assets to your successor during your lifetime so that any appreciation on those assets is not subject to estate taxes. The cost of not having a business succession plan in place is the risk of having your business sold at a discount upon your death.
Once you have identified your business succession goals, you should decide what legal mechanism will effectuate your goals and ensure the continuity of your business. For example, one common ownership transfer mechanism that would be focused on the goal of ensuring a smooth transition of ownership may be a “Buy and Sell” Agreement. These agreements stipulate that in the event that one of the owners dies or otherwise leaves the business, the remaining owners may purchase that ownership interest. This type of ownership transfer typically results in a smoother transition as opposed to offering the ownership interest for sale to an outside party who has no first-hand knowledge of the business, the other owners, managers, or company culture and may have a business philosophy that does not coincide with yours.
However, if your goal was to maximize your profit upon your departure, then you may consider offering your company for sale publicly or merging with another company. Meeting with a corporate attorney or an attorney that specializes in business transactions is an important first step as they will likely be able to provide you with valuable insight and may help you to create a business succession plan that is tailored to your objectives.
In some cases, an owner of a given company has such specialized knowledge of the intricacies and operations of a particular company and is inextricably tied to that company’s financial success. When that individual fails, the company fails. This is referred to as a “key person.” Companies that have key persons that are crucial to that particular company’s survival and financial success may consider purchasing key person insurance. In the event of the key person’s death or inability to perform their job, the company receives an insurance payoff which will carry the company until such time that they can find a replacement person, or pay off debts, distribute money to investors, pay severance to employees and close the business down in an orderly manner.