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Planning for Succession

Planning for Succession

To manage your business for long-term value, you need to build on a solid legal and ethical foundation. If you stay disciplined and constantly exercise due caution, succession will be easier. Plan every important step. Success (in the end) in succession planning is achievable. Succession can be accomplished according to your plans.

Practice Discipline

Success has always required a disciplined approach, including the discipline to plan each big step before it is time to take the big step. The same discipline should be applied in succession planning. Selling your business of course requires careful planning because it is complicated, with many steps and requirements involved. The more complex it is, the more well planned it needs to be. Discipline yourself to do appropriate amounts of succession planning covering all aspects of succession. Careful planning is especially valuable if done consistently. Whether you are thinking you may keep the business for a long time, or want to sell the business sooner, succession may happen unexpectedly, so it is best to have a plan and update it consistently, and the sooner you make plans, the better prepared you will be thereafter. In order to succeed to your maximum extent, your succession planning should be extensive and begin early. It takes years to properly prepare for succession. Although succession might seem like only a distant future possibility, being truly well prepared for succession to happen is at least a couple of years in the future as well. Succession will be difficult to prepare for even were you to have an unlimited amount of time to prepare.

Lasting Foundation


You should consistently try to manage your business for long-term value, and build your business with a solid foundation, legally and ethically, Exercise due caution, and plan every step you take. Examine and refine every goal you set. Succession can end up the way you planned it to happen, but only if you plan it. Without planning, a succession can take any shape or form. Anything can happen, and usually, that means bad news. Besides financial effects, when property passes through your estate to its new owners, there is an unavoidably terrifying and unsettling transition in human terms. Good planning can greatly influence financial and human results. The overwhelming nature of human mortality should not deter you from planning for it now. Careful planning is always valuable. Whether you are thinking you may keep the business for a long time, or want to sell the business sooner, succession will happen eventually. At the time of the end, an unavoidable human transition will take place, a big step by any measure, and for a succession to be most effective and successful, the business should be as effective and successful as possible.

Positive Attitude

Your entire life's worth may not exist at this time, and you cannot predict what will happen in the future, and you could naturally feel that you cannot influence your future that much from where you happen to be right now. If your best efforts could have no impact, you should not bother to put forth any effort at all. You do planning in order to have some kind of positive influence on the future. We should focus on planning because it is the key to preparing for the future in every way, personal or business or otherwise. In order to get through the transition, unaffected by potential arguments, taxes, and other complications, every detail ultimately has the power to affect the outcome, and you have the power to influence those future details, perhaps more so than you thought. A life devoid of planning could end as a comedy or tragedy, and both are avoidable with planning. Take pride in your good intentions to plan, and take every opportunity to prepare for both the nearer-term events and the long-term future events, including the one known as succession.

Start Early

Today it is not too early to begin to plan in earnest, whether you want to keep a business for a long time, or would gladly sell that business sooner. The reason is simple--because planning today can absolutely create value later for you and your beneficiaries. It is really never too early to start planning succession. Making smart decisions early can lead to a much better succession. Do not rush your decisions without planning. Shortcuts in the beginning are dangerous and will yield haphazard results. For example, when you elected the kind of business you want to be, did you plan? Planning helps to get it right in the first place. It takes at least twice the time and costs at least twice as much when you drop the ball when it comes to planning, and I can prove it simply by mentioning that correcting a past error takes at least as long as it took to make the error, so we have double the time invested to do it wrong and make it right. In addition, to double the amount of time invested, there are frequently adverse side effects. Sometimes these effects can be very adverse, such as where a continuing error has a cumulative cost. In addition, you cannot make up for lost time, such as where good planning would have resulted in creating ongoing cost savings or an ongoing competitive advantage, but because of lack of planning the benefits were not realized. Planning a business trip, you might be able to plan ahead and book reservations early enough to have a choice of places to stay on your trip, and being able to choose from among all the best places, you end up staying in beautiful surroundings. Planning actually expands the choices available to you.

Potential Taxes

Planning is key to saving taxes in every possible context, personal or business taxes, and of every kind, income, estate, sales, property, or otherwise. In order to pass along to beneficiaries more of the value of your property, unreduced by potential taxes, every detail ultimately has power, perhaps more so than you would expect. There are many available options that could provide considerable tax savings for the families of business owners, and all of them involve planning. Most entrepreneurs are familiar with the significant business tax planning opportunities involved in the choices of entity for tax purposes--being taxed as a corporation, an S corporation, a partnership, or a sole proprietorship. Several succession planning strategies include tax consequences that are every bit as meaningful and important in the context of the relevant income and estate taxes. Another reason for the succession plan is to avoid the worst-case scenario with taxes. The most regrettable thing in the world must be to allow the worst-case scenario to occur because of a failure to plan for a major contingency. Unplanned scenarios are very tangled, and unplanned tax consequences could be very costly. Planning goes hand-in-hand with tax efficiencies.


Buy-sell Agreements could be fantastic for many entrepreneurs in companies with multiple owners, but entrepreneurs do not always plan for the worst case. Exercise some skepticism about your plans. Ask yourself whether you are choosing the right business partners. A business with multiple owners can structure a buy-sell agreement among them to provide mechanisms for continuity of the business until succession occurs upon an owner's death. Some buy-sell agreements provide the deceased owner's family with a mechanism to receive liquidity, sometimes funded with life insurance. The buy-sell and the insurance are powerful means to retain the continuity of founders, owner-managers, and owner-employees. Planning opportunities in buy-sell agreements also concern contingencies like an owner's divorce, bankruptcy, disability, or an existing owner who was active once but has lost interest in the business. (It should not surprise anyone when an entrepreneur develops greater interests in new and other pursuits.)

If employees or contractors become owners, it can be a great means for retaining talented people long-term. Stock restriction agreements allow business owners to transfer a business interest to a key employee without risking that it might go to waste if the employee departs. The stock restriction agreement provides the business owner with an option to repurchase the shares if the key employee terminates his/her employment. They are “golden handcuffs” that help retain a key employee. The restrictions also can give the business owner the option to avoid being partners with a disgruntled former employee. Very importantly, stock restriction agreements also enhance the ability of the business to protect intellectual property and customers.

Businesses also needs to recruit and train new dedicated and talented people to succeed management when it retires. Proper succession planning should be done to indicate who will step up when the time comes. Planning for business succession can facilitate the management transition of your business and avoid unnecessary distractions.

Estate Planning

Business owners need to consider, among other things, who will succeed them as owners. There are big tax and logistical implications–the costs–probate and the estate tax burden–and the risk that a financial future could weigh in the balance. Estate planning is not only a necessity, if is a unique opportunity to accomplish so many goals-



The estate tax creates particular problems for both businesses and families–the business often constitutes a large percentage of the deceased owner's net worth. The estate tax is a very high percentage of a large estate, and when that happens to be the case, insufficient liquidity is a debilitating hardship. Without proper planning, the estate tax is devastating, and the business and the family members who survive may be forced to sell the business at the worst possible time. A forced sale should be avoided through proper planning.

Lifetime Transfers

There are often tax advantages in making lifetime transfers. Gifting interests in your business during your lifetime allows you to avoid estate tax on the transferred interest itself and any appreciation n value that occurs after the gift. There are several ways to make lifetime transfers of ownership interests.

Living Trusts

A business interest can be held in trust. This arrangement can serve both non-tax and tax objectives. A living trust can designate who inherits your assets and is preferable to a will. Living trusts have an advantage over wills because, if ownership of your business is titled in the name of the trust, they allow an individual's estate to avoid probate. Probate is time-consuming and costly. If you die without a will or trust, the intestacy laws will dictate which of your relatives would succeed to all your assets—not necessarily the persons you would have chosen to own and operate your business. A living trust allows you to designate a trustee who will be responsible for managing the trust assets upon your death or incapacity. It may be desirable to name a special trustee to manage the business interest.

Annual Gifts

One option is to gift small interests in your business each year. Under current tax laws, you can transfer up to the annual exclusion amount (currently $13,000) per gift giver (called a “donor”) per gift recipient (called a “donee”) per year without being subject to U.S. gift tax or utilizing any of your lifetime gifting exemption (currently $5 million). For married individuals, your spouse can also make annual exclusion gifts. Although the annual exclusion amount is relatively small in any given year, depending upon the number of family members receiving ownership interests, over time this strategy can provide significant transfer tax savings. Also, with a gift of a minority interest in a closely held business, the value of the gift can be reduced to account for a minority interest and lack of marketability. This strategy can be especially helpful where considerable appreciation in the value of the business is expected.

Lifetime Gift Exclusion

Another option is making a gift in excess of the annual exclusion amount. Each individual currently has a $5 million gift tax exemption available for lifetime gifting. This may be reduced to $2 million on January 1, 2013. Thus, gifting larger amounts before the exemption is reduced may be advisable where your estate is large or death is imminently expected.

Sale on Credit

An additional technique for transferring ownership interests involves selling a portion of the business in exchange for a promissory note. The note is then repaid over time, often using the dividends or net revenue received from the business. By selling the interest, the owner is able to transfer any future appreciation of the business free of estate or gift tax. Where the sale involves a minority interest in the business, the purchase price is generally reduced to reflect the market value of a minority interest. In addition, because interest rates are at relative lows historically, the purchaser (usually one or more chosen family member(s)) is currently able to finance the purchase on favorable terms. Where desired, the sale may even be structured in a manner that allows the selling owner to defer capital gains on the sale.


Another gifting strategy involves the use of a trust known as a grantor retained annuity trust (“GRAT”). A GRAT is an irrevocable trust established by an individual who transfers a portion of his/her business to the trust. The terms of the trust require that the trust pay the individual an annuity over the term of years chosen by the individual. Provided the individual survives the chosen term, the assets remaining in the GRAT pass to the beneficiaries selected by the individual, commonly the individual's children or a trust for their benefit. The main advantage of a GRAT is that it transfers any appreciation of the business that occurs during the term free of transfer taxes, and often without the use of any lifetime gift exemption. Depending upon the appreciation of the business interest that occurs during the term of the trust, the tax savings can be substantial. GRATs have been particularly successful where the owner anticipates the possibility of a future sale of the business or taking the business public, though planning in advance of such events is required to maximize the effectiveness of such planning.