Your business is important to you. You have worked hard to achieve the success your company has, and you want to make sure that your business is protected even after you are long gone. Succession planning is part of a well-rounded estate plan. Business owners use succession planning to determine who will take over their company—if anyone—after they die. Here are the things to know about succession planning.
It might seem odd to start a succession planning discussion with life insurance, but, if you die with life insurance, you should direct the life insurance payout to your business. That way, your company gets a cash boost during a tumultuous time. There will be enough money in the bank to satisfy the payroll, and the cash influx will prove instrumental in ensuring a smooth succession—if there is to be one.
Have you thought about what you want to happen to your business if you die? If so, it is important to document this in writing. Only you can make this decision, though it is wise to confer with your management team as to what they think should happen. Once you feel comfortable, document it in writing. Contact an estate planning attorney to ensure that your documentation is properly done. Otherwise, your business may be put in the middle of an acrimonious succession.
Perhaps you want your business to be liquidated and sold after you die. An M&A transaction stands for “Mergers and Acquisitions.” M&A transactions are complicated. During these transactions, ownership of the business (or the cash from the liquidation) is transferred to another entity or the company is consolidated with another entity. If you decide that this is what you want to have happen after you die, that also needs to be documented.
During an M&A transaction, some of your management team will need to stay on to see the process through. Give some consideration to how you want to incentivize them to stay through the process, even though it means that they will be losing their jobs.
You might also want to keep your business in the family. Only you can determine whether your children are the best ones to take over your business, but note that, in terms of family transfers, a business is gifted to your kids, not sold.
This is actually a good thing because it helps avoid certain taxes if you still want income from the business. If your kid has to buy your business, they will first have to make the money and pay taxes on it. After that, you will be paid a dividend on which you will have to pay a capital gains tax. Though gifting means you won’t get anything in return for the ownership you gift your kids, this could pay off in the long run, if you are being kept financially secure by your old company.
If you’re not gifting your business and your company has multiple owners, you will likely run into one of these buy-sell arrangements: an entity plan or a cross purchase agreement.
In an entity plan, each owner of the business has their own private agreement with the business as an entity. This agreement states that the entity will buy the dead owner’s interest after his/her death.
In a cross purchase agreement, there are usually two or three people who own the business. the cross purchase agreement is established between the owners. When one dies, the surviving owners each purchase a proportionate share of the dead owner’s interest.
All of this is a little confusing, and that isn’t a bad thing. You want a succession plan to be detailed and comprehensive. Hire an estate planning attorney to ensure that your succession plan is done properly and documented correctly.