Methods To Consider When Preparing A Succession Plan
You may be a business monarch, but do you have a solid succession plan in place? Preparing a succession plan early will help your business avoid conflict by setting up details on how future business decisions should be made, allow you to train any potential successor, or even help you transition out of full control of your business.
There are several methods you may want to consider when preparing a succession plan, each of which will allow the organization to survive an owner retiring or relinquishing control:
Selling the Business Interest – sell your business interest outright in return for cash or other assets. Most partners or company officers have the option of selling before they retire, at retirement, at death or at any time in between. You may have to pay capital gains tax you sell before your death.
Transferring Business Interest with Buy-Sell Agreement – a legal contract that arranges the sale of your business interest in advance, to be enacted at a predetermined event such as retirement, disability, death or divorce. The buyer is obligated to purchase your interest at fair market value at the time of the triggering event.
Granter Retained Annuity Trusts or Unitrusts – GRATs and GRUTs are irrevocable trusts to which you transfer assets while still obtaining an income for a given period of time. At the end of this period or upon your death, the assets in the trust go to the other trust beneficiaries.
Private Annuities – This is the sale of property in exchange for regular payments to you for the rest of your life. Ownership of the business is transferred to family members or another buyer, who promises to make periodic payments until your death.
Self-Canceling Installment Notes – SCINs allow owners to transfer a business to a buyer in exchange for a promissory note from the buyer to make a series of payments. The remaining payments are canceled upon the seller’s death.
Family Limited Partnerships – This can help when transferring business interests to family members. You establish a business (partnership) with general and limited partnership interests, then transfer the business to the partnership. Over time, you may gift your business interest to family members.
Keep in mind that any decision about succession planning needs to incorporate an accurate plan for valuing your business. Generally, appraisers choose one of the following methods for valuing a business:
Fair market value. This is the hypothetical cash exchange price that a willing buyer and seller would agree upon as payment for the company with mutual knowledge of all the relevant facts.
Investment value. This is the value the business represents to a specific investor — a successor in a family business or a competitor looking for a company to buy — and incorporates specific considerations above and beyond the fair market value cited above.
Liquidation value. This value assumes that the business is no longer viable — worth more dead than alive — and the owner is compelled to sell its assets piecemeal.
If you are thinking about setting up a succession plan for your business, we are always happy to help with any questions or concerns. Feel free to call The Kendrick Law Group at 407-641-5847 to set up a consultation with one of our experienced attorneys.
Co-written by:Kyle Wilhelm, Law Clerk