Succession Planning – An essential part of a comprehensive estate planning is succession planning. This is important when a client owns a significant interest in a closely held business. In some cases, the business interest is the largest single asset in the estate. In addition, the business interest may produce much of the income that is generated for the family. There may also be instances where the client wishes to transfer his interest to younger members of the family who are currently in the business, or who the client wishes to bring into the business in the future.
Whether the client wishes to sell his interest in the closely held business at his death, or pass it on in some fashion to his family or employees, it is essential that a plan be developed. The plan, which is sometimes referred to as a succession plan, provides in general who will own the business, and how it will be operated. The plan requires an analysis of the business and the strengths and potential weaknesses of those who will step into the owner’s shoes.
In the case of a sale, some of the issues that must be addressed are as follows:
- Are there other owners (stockholders or partners) already in the business who would be the likely purchaser(s)?
- Has a valuation been agreed upon either as to amount, formula or methodology to determine the value?
- Is there insurance in place to fund the purchase, or if not sufficient, is there a structure for the buy-out that protects the business but also protects the interest of the departing shareholder?
- Will the business be able to continue to operate so that it can satisfy its obligations to the deceased stockholder?
If, instead of sale, the business owner wants to leave some or all of his interest in the business to his family or employees, the plan takes on a greater degree of analysis. Will the interests be transferred by gifts or bequests, or will it be conveyed by sale? If the interests are sold, what assurances and security can be given to make sure the payments are made in the amounts and at the times provided? Who will own the business and help train the family members if they have not already assumed the necessary responsibility? What alternate plans can be made if the designated family member or employee departs, or does not perform his/her duties as expected? Is the price being charged for the interest fair to both sides?
As can be seen from this general overview, there are many issues to consider when a closely held business is an asset of a client. The advisor should raise these issues and make sure that the client’s objectives are realistic and can be achieved. Once a plan is formulated, it should be discussed with the appropriate parties and agreed to by all. It should then be funded, to the extent that can occur, and reduced to writing, so that there is no ambiguity in the plan. This way, the family of the client will know what to expect and when, and the recipients of the interests will have a plan themselves as to how to proceed.