Creating a Business Succession Plan

You’ve built up a successful business through years of hard work and dedication, but the time has come to consider whether to pass this business along to your beneficiaries or to choose a successor to carry on with the enterprise. You may be thinking about retirement or facing health challenges that force you to withdraw from daily operations; or, you may just be thinking in practical terms and planning ahead. Whatever your stage of life or in your business ownership, you need a succession plan.

Choosing a successor depends a lot on the type of business you have: is it a sole proprietorship, a partnership, or a Limited Liability Company (LLC)? If you are the sole proprietor and run a family business, passing it on is easily accomplished through your overall estate planning. Other business types, however, probably involve additional legal instruments and strategies.

If you’re a business owner in or around North San Diego County, my office can help as I have 30-plus years of experience helping individuals and families with their business planning success needs and estate planning.

Why Having a Business
Succession Plan Is Important

Like everything else in life, we can never be sure what the future holds for ourselves or our business, so we need to plan for every contingency. 

Planning for yourself and your loved ones means having trusts and powers of attorney in place in case of incapacitation. When you’re unable to make decisions and carry them out yourself, you need someone to do so for you. For your personal needs, this means naming a trustee. If you own a business, this means having a successor in place.

A successor must be trained in every aspect of the business, so when the time comes for that person to take over, the transfer can be seamless. 

If you own the business yourself, your successor could be a family member active in the business with you, or a key employee. If the successor is a family member, a trust can be used to transfer the business. If the successor is a key employee, an agreement may also be necessary to sell to that person when the time comes.

Making Plans for a Partnership or LLC

If you’re in a partnership or an LLC, you need to have an agreement in place to pass on your share of the business to the others, generally through a buyout. This type of arrangement usually involves taking out life insurance policies on each other, so if one partner dies, the proceeds from the insurance will fund the buyout.

There are two versions of this arrangement – the cross-sell purchase agreement and the entity-purchase agreement. In a cross-sell agreement, each partner purchases a policy on the others. In an entity-purchase agreement, the company itself purchases the policies.

There can also be agreements in place for one partner, or member in an LLC, to sell to the others, with mechanisms in place to determine the value of the business and the subsequent buyout amount.

If you have a family trust, you need to ensure that the assignment of interests to the trust is in place to avoid probate if your LLC is intended to pass pursuant to the terms of the trust.

Types of Business Succession

Regardless of the structure of your business, SCORE – the nationwide network of volunteer business mentors – identifies four options when the time comes, whatever the reason, to transfer ownership:

  • Transfer the business to your heirs
  • Sell the business to your partner(s)
  • Sell the business to a key employee
  • Sell the business to an outside buyer

Considerations in a Succession Plan

Regardless of which route you choose, you must weigh the tax consequences and plan to lessen or avoid those liabilities as much as possible through planning in advance. This is especially true when a family transfers a business from one generation to the next. Tax liabilities to be considered include:

  • Income Tax
  • Gift Tax
  • Generation-Skipping Tax
  • Estate Tax

Another area to consider is debt. A business owner may have a line of credit or loan from a bank that can be called in if he or she dies or becomes incapacitated. The succession plan should include provisions for handling any outstanding debt.

Perhaps one of the biggest sticking points in succession – if it involves any sale or partial buyout – is valuing the business. This can be done through a CPA’s appraisal or through an agreement among the partners in a partnership.

Estate Preservation Group — Experience You Can Trust

Regardless of the type of business you run, your part in that enterprise is an important piece in estate planning. If you’re the sole owner, you can create a trust to appoint a trustee to take over the business when the time comes. If you’re a partner, your portion of the business can be designated for your heirs through a will or trust. 

Integrating your succession plan with your overall estate plan is essential. Depending on your circumstances and business type, there are many different ways to do this.

With three decades-plus experience in estate planning, I can help you create a comprehensive estate plan to take into account your business as well as all your other assets. Contact me at the Estate Preservation Group if you’re in Carlsbad, Oceanside, or North County San Diego. Together, let’s safeguard your future.


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