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The AR Group

Business Succession Planning – Protect Your Legacy

By Jeanette Eirich

Whether planning for retirement or minimizing business disruption due to untimely death, business owners should develop a business plan for the succession of their company to protect the legacy they fought so hard to achieve.? Business succession options are varied and planning can be quite complex.? A business owner needs to consider a myriad of factors, including the economic, personal, psychological and emotional impact of decisions.? Succession planning affects employees, family members, other owners and the viability of the continuing business.? While there are a variety of options available to business owners when fashioning a succession plan, the goals must be carefully considered and clearly defined.

Two commonly used options include Next Generation Transfer and Employee Stock Ownership Plans.? Transfers to the next generation often do not succeed, however, with appropriate planning, the transition can be made smooth and lay the foundation for success.? Having children active in the business and planning to take ownership presents a wealth of opportunities and some drawbacks.? With family members, business owners can take advantage of gifting and company valuation discounts when transferring businesses to children.? Often times, a Family Limited Partnership will work for the transfer of business to family members.? Owners must be aware, however, of the emotional and psychological impact on other family members not active in a business and disagreement among family members that spills over from business into personal interactions.? The Employee Stock Ownership Plan can also be used for transfer of business to family members as with non-family members.

Employee Stock Ownership Plans (ESOPs) are retirement plans wherein the company establishes a fund and employees and/or the company provides stock (or money for stock purchases) to the retirement plan.? Shares of stock vest over time and are only distributed upon the retirement or death (or termination or disability) of an employee.? Upon distribution, the employee either sells the stock on the open market or back to the company.? Contributions are tax-deductible and employees pay no tax on contributions until distribution.? ?Additional tax benefits and consequences exist, for example, under certain conditions owners selling to an ESOP can defer taxes on gains by reinvesting in securities of other companies.? These plans should not be confused with employee stock option plans which are not retirement plans but provide employees an option to purchase stock at a set price within a specified period.

According to The National Center for Employee Ownership (NCEO), in 2013, there were nearly 11,000 ESOPs and stock bonus plans covering over 10 million employees.? Approximately two-thirds of ESOPs are created to provide a market for stock shares of departing owners in closely held businesses.

Check back for future articles with information on other options for business succession planning, such as Public Offerings, Recapitalization, Sales to Third Parties, Liquidation and Buy-Sell Agreements.

Smart Tip😕 Business succession planning is complex.? Consider not only the business owner’s goals, but also tax consequences, and the impact on employees and family, including potential benefits.? Owners are encouraged to seek the assistance of counsel who can construct a custom succession plan suited to meet individual company needs.