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Business succession planning is a bit like estate planning for your business or enterprise. It ensures that when you retire or, should you become incapacitated or pass away, the business you have built can succeed, provide income, and take care of your family and employees for years to come.
A business succession plan also ensures that your customers receive consistent, quality care during the transition and helps retain the value of your business as it passes to the next generation.
A thorough business estate plan should include your plans for the business’s future and name who you will appoint in key leadership roles (such as family members or existing employees). It should also include training plans for these employees, as well as roles and transition responsibilities.
Finally, a business succession plan should establish an ethos or shared corporate culture of values, goals, and driving principles that will guide your business into the future.
The best time to begin planning for your business’s future is the day it’s established. At the latest, you should begin putting together a comprehensive plan at least 15 years before you anticipate retiring or passing on your business. A good succession plan can take up to one to three years to put together, so starting early is best.
Having said that, unexpected accidents or injuries can happen at any time, and the earlier you sit down with an attorney to consider your business’ future, the better.
The ideal successor should be young enough to steer the business for years to come and be available to and interested in running your business.
They should have the skill set to manage and grow your enterprise effectively and be willing to learn from you. And while an ability to innovate is key, you should make sure this person will innovate prudently and not squander resources.
Finally, your successor should have the means to cover any payment price and the financial sense to wisely and effectively grow and manage your business.
You have several options. You may choose to sell your business to a family member, business partner, or competitors. You may also give your business to someone as a gift, add a partner and name them your successor, or hire a manager and do the same.
It’s important to give yourself plenty of time and start the process as early as possible. Be aware of the strengths and weaknesses of the person you’re appointing, and consider hiring others to give that person the support they need as they begin leadership. Be willing to step back into your business as needed to guide the transition.
Finally, make sure that those in leadership roles understand what to do and who to call should you become incapacitated or pass away. Having your team understand well in advance what will happen can help the process run more smoothly and prevent service gaps, confusion, or delays within the company.
Financial planning is key to successful business planning. This can help ensure an operating reserve, address any debts, and allow you to walk away from the business without continuing obligations to creditors.
To plan successfully, it’s a good idea to have your business professionally valued to determine a potential purchase price. Identify your debts and plan for the possible loss of customers and revenue during a transition.
Purchasing “key man” insurance for yourself can help your business to cover the costs of transition. Disability insurance is helpful if you become unwell, and a life insurance policy can help pay off your estate.
Finally, have necessary contracts in place for successors, managers, employees, customers, and vendors, ensuring that operations can proceed with minimal interruption. These steps can help you transfer as expected and also provide a safety net in case of unforeseen illness or incapacitation.
It’s important to be aware that the sale of your business will trigger income tax on the difference between your investment and the sale price. These taxes could be as high as 20%, but this can often be mitigated by taking smaller payments over years as opposed to a single, one-time payment.
If you operate your business through a C corporation, consider electing to have it taxed as an “S” corporation to lower taxes on the sale of stocks. Make this election as soon as possible (at least five years before the planned sale) to avoid high corporate taxes.
Income tax on the sale of some assets can be deferred through making an exchange of like-kind property. For example, buying farmland with revenue from sales of improved real estate, something known as a “1031 exchange”.
While helpful to many business owners, none of these strategies should be attempted without the guidance and input of an experienced business and tax law attorney. Attempting to minimize tax liabilities on your own could be costly and legally risky to your business and to yourself.
Attorney Laura Davis is an accomplished business law and estate planning attorney serving California. For 35 years, she’s helped business owners just like you plan for the future, pass on their legacies, and ensure their succession plans are secure and viable.
Have questions, or in need of quality legal guidance? Reach out to The Law Offices of Laura A. Davis at (831) 318-5593 for an initial consultation today.
Consider what type of business you own, as plans for sole proprietorship, partnerships, and corporations will differ. Make sure that buy-sell agreements are in place if a sale of your business is expected, and ensure that succession plans and personal estate plans are prepared should you become incapacitated or pass away.
Finally, make sure that intellectual property protections (e.g., copyrights, patents, and trademarks) are in place, that lease documents for properties are in order, and that non-compete agreements have been signed by current employees.
Consulting with a financial advisor is a crucial step for making sure your exit plans are tenable and financially sound. Consider the results of a sale or transition and how this will impact you financially as you hand over the company.
Above all, it’s important to be realistic and adjust your financial goals and personal goals accordingly. Consider all possibilities and make plans to budget based on all possible financial results of your sale or transfer.
It’s crucial to know the real value of your business before you sell or transfer it and to ensure the transition is smooth, fair and meets your personal needs and the needs of your business.
A qualified business evaluator (such as a CPA or independent appraiser) can help you understand what your business is worth.
Be prepared to provide this evaluator with tax returns, property tax information, contracts, and copies of all organizational documents (such as articles of incorporation and buy-sell agreements).
Review your business plans at least once a year, if not quarterly. Triggers for as-needed review include changes in business revenue, changes to the economy (such as recessions), changes in personnel, and changes to business or tax law.
Ideally, your partners will continue the business for you, but the future of your interest in the partnership depends on the legal agreements that you have in place.
In a general partnership, California law requires the partnership to buy out your interest at the greater of liquidation value or based on a sale of the entire business as a going concern.
In many other cases, however, your owner’s voting rights terminate when you die, leaving your family to rely on partners to buy them out or allow them to continue as passive investors.
It’s extremely important to consult with an attorney to better understand what rights your heirs will have to the business or your interest in it when you pass away and help plan for their as well as the business’s future.
This depends entirely on the type of business, what your business succession plans state, and what your personal estate plans dictate. For example, your spouse could be willed the entirety of your sole proprietorship business. If your business was a partnership, your spouse will likely find themselves bought out by your partners after you pass away.
If no estate documents exist, California law will consider whether the business was started before or during your marriage. If the business was started within the bounds of your marriage, the business interest might be community or marital property, with all of it being left to your spouse.
If your business was started before you married, some of your business may be distributed to your spouse as well as to surviving children or other relatives. To make sure your wishes for your spouse are known and carried out, it’s important to include both them and your business in your estate plans and consult with an attorney about your wishes.
This depends on the type of business. If your business is a sole proprietorship, a will or trust can order your business to be dissolved, though your spouse’s community property can only be controlled with their consent.
Partnerships, unless otherwise agreed to, will buy your spouse out, while LPs and LLCs can not be dissolved unless the other partners agree to this.
Finally, if your business is a corporation, you can direct your executor or trustee to dissolve your business if you own 50% or more of the stock.
This depends upon how your business is structured. If your business is a sole proprietorship, it can generally be placed within a trust.
Members of a partnership, LLC, or corporation can also usually transfer their interest into a trust unless operating documents prohibit this or prohibit entrustment without the permission of other partners, members, or shareholders.
However, exceptions apply if your business reflects professional licensure, such as a legal practice, private medical practice, or a contractor business. To place such a business in a trust, the trustee and beneficiaries must also be licensed professionals in your field, and strict rules about interest and shares apply.
Still Have Questions? Ready To Get Started? For more information on Business Succession Planning In Monterey, CA, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (831) 318-5593 today.
Attorney Laura Davis is an accomplished business law and estate planning attorney serving California. For 35 years, she’s helped business owners just like you plan for the future, pass on their legacies, and ensure their succession plans are secure and viable.
Have questions, or in need of quality legal guidance? Reach out to The Law Offices of Laura A. Davis at (831) 318-5593 for an initial consultation today.
