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  • Successful Succession Planning for Your Business Calls for a Deliberate Process

    As seen in the May 2021 issue of “Inside the Gates” magazine

    By M. Timothy Whittemore, CPA, MTX

    You’ve built a successful business, but have you thought about how you’ll make your exit? The business likely represents the vast majority of your wealth — so how you monetize it for retirement is an important component of your financial picture.

    It’s easy to put off planning when you’re focused on day-to-day operations, or because you think you have an idea about who will take over your business and how that will look. Yet the time to address succession planning is five to 10 years before your expected exit date, because creating a successful plan is a deliberate and complex process.

    Here are some key aspects of succession planning to consider.

    Family Business

    When it comes to your business, talk with family members early and often about their desires. Your children may have no interest in running the business you built, or some may be interested while others are not. You’ll need to determine how to split the business equitably to avoid conflict.

    Family-related issues grow with the family tree as more members stand to benefit from the work of a few. You’ll need to resolve these questions, and more, regarding family members:

    • How do they acquire the business from you?

    • If you’re dealing with stock, do you gift it or sell it to them?

    • Do you finance the sale or require them to get bank financing?  

    • What are your, and their, income and estate tax consequences of the alternatives?

    • Do you have an adequate life insurance policy on the owner and key executives to redeem out an owner or pay estate taxes if you die?

    vDo you have key employment contracts and noncompete agreements on key executives that would prevent them from opening their own shops to compete with the business if you sell it or die?

    • If you do sell, does a child working in the business have a job with the new owner?

    Financial Performance

    For your company’s financials to look impressive to a prospective new owner, begin laying out a plan to show the business’s growth potential, profitability, and return on investment (ROI). To justify the increased risk associated with a small business, the ROI must be much higher than could be had in the stock market.

    Questions a potential investor will have include:

    • Do you have a well-trained and educated workforce?

    • Can the business run without you?

    • Do you have well-defined, documented, and efficient business processes?

    • Do goodwill and other intangibles exist that can be transferred to me?

    • How do you compare with your competitors?

    • Is the industry itself at risk from new technology (e.g., you may have the most successful hardware store in the area, but is a big-box store a threat on the horizon)?

    A tax-savvy owner may want to run every possible expense through the business, which can have a negative effect on its valuation. Some of these expenses are personal in nature and result in artificially low income, which may provide the impression that the business didn’t do as well as actually did. It’s wise to keep personal expenses out of your business.

    Tax-Efficient Ways to Sell

    It’s not what you sell the business for but what you keep that’s important.

    For example, an employee stock ownership plan is an excellent way to sell a business. As the owner, you can defer the entire gain on the business’s sale by reinvesting proceeds within 180 days in qualified publicly traded stocks. If you hold those stocks until death, no taxes may be incurred. And you may get better tax results if you sell stock rather than your company selling assets and then liquidating. 

    You might also consider financing some or all of the sale, which can benefit you. For instance, under installment sale rules, your tax liability is deferred until the principal is paid over the term of the note. You could get interest on the note at a rate higher than you could obtain elsewhere. The downside is the risk of the buyer defaulting on the note, which has happened due to the coronavirus pandemic.

    The Unforeseen

    Sheldon Adelson, who was the founder, chairman and CEO of the Las Vegas Sands Corp., was quoted as saying, “Why do I need succession planning? I’m very alert, I’m very vibrant. I have no intention to retire.”

    You may not have considered your mortality, or envisioned the day you’re not capable of running your businesses. Yet no one is immortal or immune to life’s unexpected occurrences. Disability succession is an essential part of the plan, including disability buyout insurance.

    Hearts and Minds

    Contrasting with Adelson’s view is this perspective from leadership guru John Maxwell: “A leader’s lasting value is measured by succession.”

    As a leader, one of your most important roles is building a team and culture that intentionally outlast you. In fact, succession starts by preparing hearts and attitudes, and then focusing on the right practices and processes.

    As you think about succession planning, you need to make a fierce commitment to it to ensure that the plan far outlasts any current leaders in the company. Have discussions with your key managers on their participation in the business, and start laying the framework for a succession plan that does not involve either of those parties.

    A successful succession plan also helps build the bench strength of your organization to ensure long-term health growth and stability. Start early and review often.

    About the Author:

    Tim Whittemore, CPA, MTX, is a professional with nearly 40 years of expertise specializing in tax planning and IT consulting. Prior to joining CB Smith & Associates, he was a founding partner of CoNexus CPA Group LLC. He also worked at Tarica and Whittemore PC, and at KPMG in Peat Marwick’s audit department before becoming a manager in the tax department and handling tax issues for small to midsize businesses. Before entering accounting, Tim was a computer programmer. 


    Chris Smith | 05/28/2021



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