The selection and training of a successor will all be for naught if you don't also develop a financial strategy for handing over your business. Perhaps the most significant activity associated with succession planning, a financial strategy protects your company, your family and your employees against a monetary burden that could doom the entire process to failure.
For example, if you plan to turn over your business to your children, you have to think about the heavy gift taxes they will face. If you die, your heirs can suffer an equally prohibitive estate tax.
Setting up an employee stock option program is critical if you plan to sell your business to staff members. And lastly, you may decide to sell your firm to a chain or a local competitor. If so, you need to know what your company is worth so you can get the best price for those long years of hard work.
Determining Worth
No matter who inherits your business, it's critical that you get an
accurate valuation of your business.
Such a valuation encompasses tangible assets such as
real estate, buildings, machinery and equipment, as well as intangibles
like employee loyalty, manufacturing processes, customer base and business
reputation, patents on products and new technologies.
Sometimes it is difficult to estimate the value of your firm yourself, however. In those cases, professional valuation companies know what to look for and what questions to ask. You also probably need the help of your accountant and any other financial advisors.
The question of value becomes even more complicated when you attempt to put an exact price tag on your business. Price can vary depending on the circumstances. For example, the selling price to your children may be less than the amount you would ask from a large chain that wanted to buy you out. In any event, a fair value must be used, one that will withstand IRS scrutiny.
Taxes can also influence how value is determined. To reduce potential estate taxes, you may want your accountant to argue to the Internal Revenue Service that your firm has minimal value. Also, current stock purchase price or buy/sell agreements may not reflect the dollar amount you believe the business is worth.
A business valuation is also a way to predict your company's future. Using your firm's historical and financial records and your judgment as owner, work with your valuation firm to calculate whether your business will grow or decline, future inflation rates, and anticipated costs and expenses of running the operation.
The Transfer
Your successor should help determine the method you use for transferring your business.
The structure of your company will also be a factor that will influence your choice
of the transfer method.
If you are a sole proprietor and want to keep your company in the family, you need to think about federal estate and gift taxes. Or if you plan to sell your company to a family member so you can retire, you need to make provisions through insurance policies to help your successor finance the purchase as well as pay for the ensuing taxes.
If you're in a partnership, you face a different set of decisions. Does your percentage of the business automatically transfer to your spouse or offspring upon your death or, as part of the partnership agreement, is your partner supposed to buy out your shares? If you have chosen the latter arrangement, you need to take out enough life insurance to provide your partner with adequate funds to pay for the purchase.
Closely held corporations have issues of their own. Stockholders may stipulate that upon their death, their shares will automatically transfer to their surviving spouse or children. However, if the shareholder's heirs subsequently want to sell their stock, sufficient provisions should be made so remaining shareholders have enough cash for the buy-out.
Here are some of the ways you might arrange for the financial transfer:
Gifting
Trusts
Buy-Sell Agreements
Life Insurance
These are only brief overviews of each of these methods. Before making a final decision consult legal and financial advisors to see which might be the best for your particular financial situation.
