Business Succession Planning

What is Business Succession Planning?

At PATHFINDER WEALTH ADVISORS we believe that a Business Succession Plan involves the development of a strategy to transfer ownership, management and perhaps most important, philosophical responsibility for the business from senior to junior family members or from senior to new management. It starts with understanding the transition goals of the business owner and the complexities of both the business and the family/other owners in order to  determine how the plan will be developed. The owner's needs for financial security from the business as well as other personal or philanthropic goals are  major issues to be addressed. Meetings and/or interviews with family members or other stakeholders in order to educate them about the implications of the transition from an ownership and tax perspective may be included in the process. 

The death or disability of a partner or major stockholder in a business can have devastating effects on both the business and the deceased/disabled partner’s surviving family.  The business is concerned with gaining control of the deceased partner’s interest at a fair price so that it can continue operations without interference from the surviving family members.  The family members may be most concerned with receiving as much money as possible for their interest in the business and for capital that may be needed for estate settlement purposes. Thus a  business succession plan is a critical component of an owner's overall wealth plan.


The Need for a Written Agreement

Absent a written agreement, the competing interests of the business and the family members could lead to major conflicts, litigation and possibly the forced liquidation of the business.  A buy-sell agreement can potentially ensure that the business interest of the deceased partner will transfer in an orderly manner to the benefit and satisfaction of all parties.  With a buy-sell agreement in place, the stability of the business for clients, employees and investors (or creditors) is more assured.

Key elements of a buy-sell agreement include a mutually agreeable sales price and terms of the sale.  The agreement needs to be funded in order to ensure that the capital is available at the time of the death of a partner. 

Types of Business Owner Buy-Sell Arrangements

Entity Plan: Under this arrangement, used when there are multiple owners, each of the business owners has a separate agreement with the corporation or partnership as the entity.  The entity, per the buy-sell agreement, will buy the deceased partner’s interest at his or her death. 

Cross Purchase Agreement: Used in situations where there are two or three owners, a cross purchase agreement is established between each of the owners. At the death of one of the owners, the surviving owners agree to buy a proportionate share of the deceased owner’s interest.

Buy-Sell arrangements are an effective way for business owners of privately held companies to plan for the orderly transfer of business interests where two or more owners are actively involved in the business. In addition to securing the needs of the surviving family members and ensuring the continuation of the business, a buy-sell arrangement also ensures each owner that there is a buyer for their business interest at a fair price.

Business succession planning involves legal, tax and personal financial issues. Guidance from a qualified estate planning and business attorney is essential and will likely also involve the expertise of a business valuation professional, insurance advisor and the business outside CPA.

For more information on business succession planning, contact us today.

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