As business owners think about retirement, they often become concerned about having enough assets to maintain their current lifestyle, as well as what they will do after retirement and what will become of their business after they retire. Additionally, they worry about selling or transitioning the business to their children or to a key employee and how that will affect their personal relationships with these people. Finally, most business owners feel a sense of loyalty to their employees and how their retirement will affect the employees’ livelihood. In order to resolve these issues in such a way that is satisfactory to them, it is never too early for a business owner to utilize a team of advisors to start the business succession planning process. Attorneys, accountants, and financial advisors should be consulted sooner rather than later in this process.
Business succession planning is a business owner’s development of a plan for determining when they will retire, what position in the company they will retain when they retire, who the eventual owners of the company will be, and under what rules those new owners will have to operate. The normal progression of business succession planning is as follows:
- Develop goals to determine whether to sell the business to all children, the most qualified child, an employee, or an outside party for funds for retirement; or retain the business for children and also decide when to relinquish control of the business;
- Develop your advisory team;
- Have a valuation of the business prepared;
- Consider income tax, estate tax, gift tax, income requirements to sustain lifestyle, continued involvement in business, and financial planning with proceeds;
- Determine the logistics of finding a buyer and how relationships will be affected if the business is retained in the family;
- Include family members or key employees in the planning process, get their input, but retain the final decision-making authority;
- Once a plan is developed, make sure the necessary legal documents are prepared and that the business owner understands them;
- Negotiate the deal with the buyer;
- Execute the legal documents; and
- Follow through on the plan, monitor the plan, continue to review the business owner’s estate planning and financial needs, and develop tax planning ideas after retirement.
A business succession plan brings to light an individual’s mortality which is sometimes not the easiest thing to do as a result of the emotional issues involved in discussing retirement and death. Business succession planning also involves reviewing relationships and making sometimes difficult decisions as to whom the eventual owners of the business will be. The eventual owners of a business will usually come from an individual’s family, other owners, or other key employees of the business.
Business succession planning involves a business owner evaluating their life and various relationships in their life as it relates to their business. The use of business succession planning often changes those relationships, and it is often difficult for a business owner to make those changes. Therefore, they simply put off the business succession plan. However, putting off a business succession plan can be very detrimental to an individual’s family, the actual business, and the employees of the business themselves. Therefore, a good business succession plan will involve not only the business owner but also the business owner’s family and key employees. Together they will be able to establish a plan with the business owner having the final decision as to how the plan will be carried out. Business owners who die without a succession plan risk the potential demise of their business as a result of federal and Ohio estate taxes which could have been reduced with proper planning.
Please consult your attorney or accountant to start the business succession planning process.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.