succession

Passing the Torch: Smart Business Succession Strategies

Passing the Torch: Smart Business Succession Strategies. For many business owners, their business is one of the most valuable and important things they own. When it is time to sit down and create an estate plan, it is critical that business owners plan for their business just as they would plan for their home or finances. Effective business succession planning ensures a seamless transition of ownership upon the potential occurrence of many different events, such as the business’s owner’s retirement, disability, or death. All businesses need a succession plan, but many business owners overlook it.

An important part of being a responsible business owner includes developing systems to help other people operate the company without you. A business succession plan clearly states who will take over specific roles, hopefully reducing any potential disputes between family members or key employees. If the business is sold after a transition event occurs, a comprehensive business succession plan will also clearly outline the sale price and purchase terms.

Here are four common business succession or exit strategies to consider:

  • Leaving the business to a co-owner
  • Passing it to a family member
  • Transferring ownership to a key employee
  • Selling to a competitor

Whether you are a sole proprietor or a business with multiple employees, understanding your options is crucial for making informed decisions that align with your business goals and desired family legacy.

Leaving Your Business to a Co-owner

Co-owners or partners can play an important role when you plan for anticipated or unexpected changes in the future. Selling to a person who is already involved in daily operations and committed to your company may be an easy way to ensure ongoing success. You can draft a buy-sell agreement for the co-owner that addresses different scenarios, such as a gradual sale for retirement or a quick transfer in a medical emergency or upon death.

It is important to ensure that your partner has enough funds to make the purchase. This can be done in a few different ways: One popular way is by securing term life insurance that can pay out at death or permanent life insurance that pays out at retirement or disability.[1] Another way is to include terms in your buy-sell agreement for the partner to pay over time.

Passing Your Business to a Family Member

Selling or transferring your business ownership to a child, grandchild, sibling, or other family member allows you to keep your business in your family. This is a great option if your children or other family members are already working for you. There are estate planning strategies available that may help lower your tax liability by transferring some of your business as a gift using your lifetime federal gift tax exemption. Federal gift taxes on amounts exceeding the exemption will apply, but once you transfer ownership, the ownership interest is no longer part of your estate.

If you have multiple relatives that you would like to take over the business, you need to provide clear instructions as to specific roles and responsibilities in your buy-sell agreement. You may also want to address in your estate plan how to equalize the inheritance of other family members who are not going to receive ownership in the business so that these family members do not think they are being disinherited or slighted just because they have not been involved in the business.

Transferring Ownership to a Key Employee

Selling an ownership interest to a trusted employee ensures that the business is run by someone who appreciates it and is familiar with the daily operations. Selling to a key employee also requires a buy-sell agreement to purchase your business at a predetermined retirement date or in the event of death or disability.

But similar to the discussion above about selling to a co-owner, employees do not always have cash on hand. You may consider seller financing, that is, lending money for the sale with a promissory note and allowing them to pay you back directly. Not only does the purchaser benefit from the opportunity to own your business, but you (or your family in the event of your death) also receive a steady stream of income from the principal and interest for the agreed-upon period. In the buy-sell agreement, you would establish a down payment amount and monthly payments with interest until the purchase is paid in full. Negotiate the terms and clearly document them in your succession plan.

This strategy can actually work with any buyer, including family members and competitors.

Selling to a Competitor

Depending on the type of business and ownership structure, another option is to sell your business to an outside individual or competitor in the same industry. Again, you will need to draft a buy-sell agreement. To prepare for a successful sale, you may want to have an experienced manager in place, document your operating procedures, and organize your financial reports. A buyer can more easily decide whether it makes sense to purchase the business and how to step in and take over when you have taken these steps.

Additional Considerations

Estate planning is about planning for what will happen while you are alive but unable to make your own decisions as well as planning for when you have passed away. Be prepared for the unexpected by starting your business succession planning as early as possible. The decisions you make today while building and operating your business can affect your options to sell it later.

We are here to help you develop the best estate plan that properly addresses the valuable things you own, including your business. If you already have an estate plan, it is important to review it periodically to make sure that it is up to date. Give us a call to schedule your appointment today.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Nothing in this message is intended to provide legal advice.  This message is for educational purposes only.


[1] Will Kenton, Succession Planning Basics: How it Works, Why It’s Important, Investopedia (Nov. 28, 2022), https://www.investopedia.com/terms/s/succession-planning.asp.

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