Wade Law Blog

The importance of succession planning

Apr 04, 2016| BY: Wade Law Offices

Succession planning is not always at the forefront of the minds of business owners. However, having an exit plan for your business is critical to preparing for the future. The eventual transfer of your business should be part of your business plan, which is liable to change.

Among the conventional ways of transferring a business are selling the company, passing possession to family members, and changing your status from active management of the firm to passive ownership. If you intend to sell the business any time in the near future, then one of your goals should be to have appealing financial records, which may require you to pay more in taxes. Or you could use the service of a business broker and make an offer to possible buyers. In order to realize the highest price, it is preferable to have a lengthy period of time in which to sell the business. A sale that occurs very quickly is likely to result in a lower price because the purchasers will think that the business has to be sold.

If your objective is to transfer the business in the distant future, then a long-term approach involving tax minimization would be more appropriate. For example, it might be beneficial for you to have a favorable defined benefit plan that has the potential to increase your retirement savings and diminish taxation of any profits earned by the company. Similarly, you and your family can take advantage of tax deductible fringe benefits.

In the event of the death of a partner or major stockholder, without a succession plan in place, the consequences can be disastrous for the business and the surviving family of the deceased partner. While the remaining owners of the business might wish to obtain control of the deceased partner’s interest, the family members are usually most anxious about settling the estate and securing the maximum amount of funds for the deceased partner’s interest in the business.

A written agreement could help prevent any conflicts from arising between the business and the family members, and help prevent any litigation and the potential forced liquidation of the business. A buy-sell agreement can make certain that the deceased partner’s business interest will transfer in an organized manner in a way that is amenable to all parties. One of the essential aspects of a buy-sell agreement is a sales price and terms of sale that are agreeable to everyone. Life insurance is an economical method of generating capital that is needed to buy out the interest of the family and create a reserve for the business to resume its operations.

Succession planning also involves making decisions as to which roles in the company are considered to be important, determining who the successors will be, and giving them the necessary skills and experiences to handle current and future challenges and opportunities. Other aspects of succession planning include imparting knowledge and skills to potential future leaders of the company, and ensuring that there is an adequate number of qualified candidates who can assume roles within the firm. In this way, you can make certain that your company is strong and stable regardless of the obstacles it may face.

Business Planning, Succession Planning

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