As the old adage goes: Sometimes, you don’t know what you’ve got until it’s gone.
This saying is applicable to innumerable instances throughout life, not the least of which is business owners who wait to consider selling the business until the day they want to sell the business.
Succession planning for eventual transition of a closely-held business is a multidisciplinary practice that involves careful consideration of legal, business, practical, and (often) familial decisions. Early introspection and correspondent planning serve to produce an orderly transfer of management and ownership of a business, a higher value for the company, and a realization of the closely-held business owner’s non-legal objectives—all while avoiding unnecessary taxes.
Long before negotiations, due diligence, or signing a purchase and sale agreement for transfer of the business, the closely-held business owner should consider putting a team of trusted advisors into action to best position their estate plan, business, and/or successor.
Consider a few of the many areas that can be addressed early in succession planning that could eliminate transition-related headaches and losses in value and time at a later juncture:
Value. Consider the value of the business to a third-party purchaser and how to protect and increase that value. Management structure and grooming of a potential successor, goodwill and customer relationships, and legal structure of the business will certainly play into the equation. Attentive curating of financials is critical, as better understanding of valuation methods helps business owners fine-tune their internal financial and operational practices.
Estate and Tax Planning. The estates of individuals whose assets are in closely-held businesses are affected by any changes in estates and gift taxes—especially in cases of family businesses. From the early formation of trusts to the ability of insulating assets from the claims of creditors and future beneficiaries, collaboration with legal and financial expertise can effectuate a business owner’s vision. Generally, aligning the business for a more favorable tax treatment is the type of “good housekeeping” that benefits business owners in anticipation of a sale.
Buy-Sell Agreements. Closely-held business owners with an eye towards transition should enter into, or reevaluate, buy-sell agreements to ensure that a ready market exists for a departing owner’s interest in the event of certain triggering events. Whether it be an immediate family restriction, a right of first refusal, death, disability, or divorce, foresight in drafting a buy-sell agreement to suit a business owner’s interests provides for orderly succession of a closely-held business.
Regardless of the timeline for a succession, business owners can take proactive steps to increase value of the business, adequately prepare for long-term estate and tax consequences, and create or revise buy-sell agreements to suit business-owner interests.