27th Nov 2013
With business succession planning a business owner must create a seamless and legal business transition that will be used in the event of their death or retirement. When choosing to retire, a business owner may be healthy but simply decides to turn over the business to another person. If he or she has a business succession plan, the retirement process will run smoothly. However, if there is no business succession plan in place, it could be disastrous and costly. As an estate planning attorney in Orange County, I have seen quite a number of messy business successions after the death or retirement of the owner. Only a well-executed business succession plan can ensure a smooth transition of leadership.
Just as with estate planning for individuals, proper business succession planning can provide asset protection for the founders and key stakeholders of the business organization. Just as important, a good business succession plan will facilitate the orderly transition of control upon the retirement or the untimely death of the business owner or key stakeholders.
As with estate planning for individuals, business owners have many options to choose from. One mechanism that business owners can use is the living trust. Whatever the business form (sole proprietorship, partnership, corporation or limited liability company), business owners can create a living trust whereby business assets can be transferred to the trust. Upon the owner’s death, ownership of the business is thus transferred to the named beneficiary or business successor in an orderly and seamless transition.
Of course, it is possible to have several owners to a business. In such a case, a buy-sell agreement can be employed to ensure that the surviving business principals maintain ownership of the enterprise if one of the founding leaders pass away. This mechanism ensures that the founding leader’s immediate family receive monetary or insurance benefits equivalent to the financial value of the founder’s interest in the company. The buy-sell option provides a win-win situation for all parties within the company. The family of the deceased business owner will receive cash which they can deem the legacy of the deceased owner. On the other hand, the surviving partners or owners retain control of the business without any interference from outside.
Aside from living trusts and buy-sell agreements, other mechanisms that may be used include: gifting, stock purchase (or re-purchase) agreement, shareholder agreement and family limited partnership. Companies may also include life insurance policies tailor-made to their specific needs. If a company has a partner with very specific talents and competencies, the company may buy its key man insurance. In the event of that person’s death, the insurance proceeds may be used by the company while it looks for a replacement with the same talents and competencies.
The key objectives of a business succession plan is to protect the assets and interests of the surviving members as well as to facilitate a smooth transition of ownership. As an estate planning attorney from Orange County, I always emphasize the need to give priority to this activity.