Business Succession Planning

Business Succession Planning

Succession planning for a family-owned business is not just about estate planning, but is an important component of an overall wealth-transfer plan to move assets to heirs that are prepared to receive them. An old Chinese proverb posits, “Wealth does not sustain beyond three generations.” Succession planning,then, involves structuring ownership, control, and management of business enterprises to permit them to pass intact from one generation to the next. Whether the business is a regular corporation, S corporation, partnership, limited liability company, sole proprietorship, or professional practice is of secondary importance.

There is a concept in this country that accumulated wealth should be taxed at least once every generation. That concept has forced the sale of many family-owned businesses where management didn’t devote enough attention to planning for succession. Tax law changes, initially thought to be helpful, have proven to be of little benefit. Trying to save taxes by skipping a generation and passing a business enterprise directly to grandchildren can be disastrous.

A process

Retaining a business within a family is not always the best solution. The children of business owners may neither desire nor be capable of managing a business. In those cases, selling or merging a business may be the best solution. These transactions should be carefully planned and, if necessary, a method of funding the buyout should be put in place. Buy/sell agreements between co-owners should be adopted and funded.

Advanced planning can keep a business in the family or transfer it to new ownership as efficiently as possible.

Business-succession planning is not an event, but a process that involves many considerations, a long-term vision, and time. This process is an investment that produces a measurable return. Even when fully implemented, family business-succession planning should include periodic reviews and updates to account for life events and changes in the business climate.

Key elements

Business-succession planning involves several key elements:

  • Identifying the various business interests.
  • Developing potential successors.
  • Developing strategies for transferring ownership and management control.
  • Identifying the owners’ values and financial objectives.
  • Developing estate-planning strategies for the owners.
  • Retaining key employees.
  • Planning for the future success of the business.

Typically, there are barriers to success in these engagements. An owner-entrepreneur may be reluctant to let go. Conflicts may arise involving the objectives of the family and the business itself, and there may be conflicts among members of the family. The emotions can be gut-wrenching.

Knowing the various aspects of business succession planning, recognizing the issues to be considered, and having experience in dealing with them are important credentials for an adviser. At SeekingNorth, we have those credentials.


Planning requires assumptions, and the owners may need to develop alternative plans. For example, advisers may develop a wonderful plan to transfer the family business upon the owner’s retirement 15 years in the future, but the plans may need to change if the owner dies prematurely. Alternatives may be limited by the type of legal structure of the business.

Alternatives for planning and implementing a succession plan during the owner’s lifetime include:

  • A sale within the family.
  • Lifetime gifts to family members.
  • Sale to an employee stock-option plan.
  • Use of charitable trusts and private foundations.
  • A sale outside the family.

Alternatives for planning and implementing a succession plan upon the death of a business owner include:

  • A sale within the family.
  • A bequest to family members.
  • A sale outside the family.
  • Sale to an ESOP.
  • Use of charitable trusts and private foundations.
  • Section 303 redemption to pay potential estate taxes.
  • Section 6166 extension of time to pay potential estate taxes.

While not typically the driving force, business-succession planning will take current income and transfer tax laws into consideration. These are economically and politically sensitive statues, and they frequently change as the economic and political climate changes. A plan must consider the direction and magnitude of future changes and provide options for updating the plan.

SeekingNorth has helped business owners in planning and implementing successful business-succession plans, and we are available to help you with this important process.