Explore our thought leaders’ latest insights and ideas.

5 Items to Consider for Business Succession Planning

5 Items to Consider for Business Succession Planning

MaryAnn Spencer, Senior Planner

Approximately 30% of organizations in the United States have a formal succession plan in place.1 While some business owners do not want to think about someone else taking over the business they have worked so hard to establish, others may find the task of business succession planning far too complex or overwhelming. Are you a business owner who falls into one of these categories? If so, here are five items to consider when thinking about the future of your closely held business.

1. Current Structure vs. Your Goals

It is vital for a business owner to have a snapshot of the current ownership structure. This snapshot should include a comprehensive list of who is currently involved with the company and what their relationship is with you, the owner. Is a non-relative currently managing the business that you anticipate leaving to your children or relatives one day? Are any or all of your children interested in taking over the business as active participants or passive stakeholders? Do you have any critical issues or concerns at the present moment? Does the current entity structure align with your long-term objectives? It is important to think about your ideal vision for the future. How do your future goals differ from the current structure? Does the current Operating Agreement or Articles of Incorporation need to be updated to align with that vision? Is a complete overhaul of the structure necessary to carry out those goals? It may be worth understanding some of the pros and cons of different entity structures (partnerships, S Corporations, C Corporations and limited liability companies) in the event that restructuring is needed.

2. Taxes

In order to properly prepare for a potential tax liability, it is necessary for a business owner to have an up-to-date valuation of the business. Depending on the value of the business and the type of sale or disposition, there could be potential federal and/or state income, estate, gift or inheritance tax liabilities. Keep in mind, the current lifetime federal estate tax exemption is $12.93 million per person, with the annual federal gift exemption at $17,000. Each state’s potential estate and/or inheritance tax will vary. Tax planning is also important when it comes to establishing your ideal choice of entity. While tax liability is generally not the sole factor in determining the best choice of business entity, potential tax impacts should always be considered. Reviewing some of the different tax consequences pertaining to each entity may help you to choose the structure that will be most advantageous to you.

3. Liquidity

It is important to keep in mind that even if a business owner plans on having children take over the family business, it is far more complex than simply passing the baton over to the next generation of leaders. There will more than likely be significant legal and administrative costs involved with the transition, and it is important to determine whether the surviving heirs will have enough liquidity to cover these costs. As previously stated, there are also potential tax implications that your children may be responsible for, and they will need to ensure they have enough liquidity to cover these costs. In the event that your family members do not have enough liquidity to take over the business, it may be worth considering problem-solving strategies such as life insurance, debt financing or equity financing.

4. Retirement

Some owners anticipate selling their business and using the proceeds to further invest in their retirement plan. Determining who you want to sell the business to in the future will assist in your retirement planning. For example, do you anticipate selling shares of the business to your children or grandchildren at a discounted rate? Or do you want your children to forge their own path and plan on selling the business to a third party at its fair market value? Having a proper valuation of the business can also help you and your advisor to determine potential future growth, approximate proceeds upon retirement, and to establish investment timelines.

5. Communication with Family

Communication is key to creating a smooth transition and mitigating any potential family feuds. Is there one child who is better equipped to make management decisions? Is another child less financially responsible? While these conversations may not always be easy, they may help the next generation to understand your business strategy. It is important to start thinking now about who you want to take over and in what capacity, and to consider when and how you can start including your children in these conversations. Speak to a financial professional to get started today.

The 2021 Business Owner Benchmark: Fortifying for the Future

This material is being provided for educational and informational purposes only. D.A. Davidson & Co. is a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original article. These opinions are subject to change at any time without notice. Copyright D.A. Davidson & Co., 2023. All rights reserved. Member FINRA and SIPC.


Wealth Planning