Few business owners plan their exits from their businesses with as much care as they planned their entries. Just as every owner starting out needs a business plan, every owner looking to retire needs a succession plan to help transfer ownership and to achieve his or her retirement goals.

The Four Goals of a Succession Plan

While situations vary from business to business, most well-thought-out plans are designed with some or all of these objectives in mind:

  • Protecting the company’s value and ability to compete;
  • Minimizing conflicts among family members;
  • Reducing gift and estate taxes; and
  • Achieving the owner’s retirement goals.

Start Early

Starting work early on a succession plan may help ensure a smooth change of ownership. An early start helps those family members who are active in the business to grow into their new roles and responsibilities over time if the goal of the succession plan is to keep the business held in the family. Moreover, starting early provides the opportunity to make changes to the plan, if necessary, before the actual transfer of control.

One of the key starting points is for the business owner to consider their goals in transitioning the business. A few of the key questions to ask are:

  • Do you want to cash out of the business completely or retain an interest?
  • Do you intend to pass ownership to family members or key employees?
  • Is it important that you (or your family or key employees) retain control of the business?
  • Do you still desire to remain active in the business?
  • Is one of your principal goals to minimize gift and estate taxes?
  • What is your time horizon?

The answers to many of these questions can then help drive the appropriate succession strategy; whether it is transitioning to family members, selling to key employees or finding an outside party to purchase the business.

As a business owner, you should be careful not to attach provisions to the transfer of ownership that could limit the ability of the business to grow and compete in the future. Some business owners have included provisions in their wills or in the company bylaws that, for example, limit the level of debt the business can carry or restrict the types of opportunities the company can pursue.

A succession plan is also an effective tool for minimizing your estate taxes. You can capitalize on the $14,000 federal gift-tax annual exclusion by giving your children company stock over time. However, it’s important that you determine the fair market value of the shares you transfer so that you don’t run afoul of the IRS.

Letting go of the business you have spent a lifetime building is a huge decision. That’s all the more reason why you should take the time to do it correctly and consult with the appropriate professionals who can help you put together an effective and workable succession plan.

Ken Meissner, CPA is a partner at Alegria & Company and specializes in business and personal income tax and is a Certified Specialist in Estate Planning.

He can be reached at kmeissner@alegriacpas.com

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