Business Succession Planning

How to Transfer Business Ownership

Business succession planning is defined as logistical and financial decisions about who will take over your business upon retirement, death, or disability. To write a succession plan, the first step is to identify the ideal successor to take over the business, then determine the best succession arrangement.

You have worked hard to establish a business, and as a business owner, you are always planning your next move. At some point, you will no longer be involved in the business. Maybe you want to retire and walk away on a particular date. Perhaps you want to cede day-to-day operational control and sell your ownership interest.

Then again, you may prefer to run the business until you can no longer physically be able to do so. It is critical to have a sound business succession plan in place. .

No "One Size Fits All" Solution to Business Succession Planning

Business succession planning is a complex process, and every business is unique. There is no "one size fits all" solution to winding up or transitioning a business. We understand that, like you, your business is unique.

At Altman & Associates, the four most important goals of business succession are being established:

1. A new management structure
2. An ownership transition plan
3. A strategy for dealing with the taxation ramifications of transitioning a business
4. and financial security

To understand how to formulate a plan for business succession, start considering the answers to several important questions, including:

• How will you achieve your retirement goals? Identify a cash value for your retirement portfolio that represents a comfortable lifestyle.
• What is your business worth today? You must understand the cash value of your business, not what it means to you personally. Getting the actual valuation is the only way to understand the tax ramifications involved.
• What does your income stream from your ownership interest look like? Your value in your business is your ownership interest. Determine how to receive the most monetary value in exchange for that interest, along with whether you need the money.
• Do you know how to sell your business and receive optimal tax treatment? You need to decide whether you want to sell to family, other owners, or a third party. When you decide, you must then structure the transaction to minimize your tax liability.
• Do you plan to provide for your family if something happens to you? You may choose from a variety of ways to sell your business or transition to your retirement; however, is your business succession plan a part of your estate plan? Ensure that your family is taken care of and supported through your business succession plan – regardless of what happens to you.

5 most common ways to transfer ownership of your business:

1. Co-owner: Selling your shares or ownership interests to a co-owner(s)
2. Heir: Passing ownership interests to a family member.
3. Key Employee: Selling your business to a key employee.
4. Outside Party: Selling your business to an entrepreneur outside your organization.
5. Company: For a business with multiple owners, you can sell your ownership interests back to the company, then distribute them to the remaining owners.

For a business owned by individuals like family members, business succession involves proactively planning for the transition to new management and new controlling ownership after the senior or majority owners and managers die, retire, or become disabled.

Additional business succession planning considerations include:

• How to value, and how often to re-value, the entire business or ownership interests.
• How to identify the skills, experience, and character traits that future owners or managers of the business should possess.
• How to give key employees rewards or incentives to keep working loyally for the business.
• How to fairly treat family members who do not participate in managing the business.
• What restrictions should be placed on existing owners' sales or gifts of their interests in the business?
• What events (death, disability, divorce, bankruptcy, retirement, being fired for cause, etc.) should trigger a buy-out of an owner's interest in the business, and at what price?
• How to identify the terms on which the business or the remaining owners should pay for the ownership interest of an owner who has died, quit, retired, become disabled, filed for bankruptcy, etc.

Legal tools or methods such as life insurance arrangements, recapitalizations, buy-sell agreements, non-competition covenants, stock options, and restricted stock awards to key employees, and deferred compensation arrangements to advise and assist our business succession planning clients.

Business succession planning is not an all-or-nothing proposition and can be done incrementally over months or years.

At Altman & Associates, we counsel owners of closely held businesses on strategies for transferring ownership and management of their businesses to family or others in a tax-efficient manner. We advise on entity buy-sell agreements and shareholder cross-purchase agreements, or on establishing an Irrevocable Life Insurance Trust (ILIT) to fund agreements. Innovative strategies and charitable planning, contingency planning, and asset protection can be used in the trust and estate arena.

Don't leave the future of your business to chance. Call Altman & Associates at (301) 468-3220 or contact our experienced team to begin building your custom succession plan.