Business Succession Planning: A Step-by-Step Guide for Business Owners
Why Business Succession Planning Matters
Family businesses account for 64% of U.S. Gross Domestic Product (GDP), yet 57% of family businesses have no formal succession plan, according to the Conway Center for Family Business.¹ That gap may be surprising, but it’s not shocking — most small business owners are consumed by the day-to-day demands of running their companies and simply don’t get around to planning for what happens next.
Still, ignoring business succession planning puts both the business and its heirs at risk.
Why You Need a Business Succession Plan Sooner Rather Than Later
There are two major reasons business owners should put a business succession strategy in place well before it’s needed.
1. Taxes
When a business owner dies, estate taxes may come due — and a proactive business succession tax planning strategy can help manage that burden.² Without proper preparation, an owner can also lose control over how the business is ultimately distributed.
2. Business Value
Without a succession structure in place, the value of the business can decline sharply if the owner dies unexpectedly or becomes disabled.
The Business Succession Planning Process: 3 Steps
A solid business succession plan generally follows three steps.
Step 1: Identify Your Goals
Knowing what you want out of the transition makes it far easier to build a plan around it. Ask yourself:
- Do you want ongoing income from the business for yourself and your spouse?
- How involved do you want to remain in the business going forward?
- Do you want to create a legacy for your family or a charity?
- Are there values you want to protect — for example, related to your employees or community?
Step 2: Determine the Steps to Pursue Your Objectives
Several tools can help you carry out the goals you’ve identified, including:
- Buy-sell agreements
- Gifting shares to family members or partners
- Establishing various types of trusts
- Creating an employee stock ownership plan (ESOP), if you want employees to have an ownership stake in the business’s future
Step 3: Implement the Strategy
This is where your plan turns into action. Once implemented, revisit your business succession strategy regularly to make sure it still fits your circumstances — especially after major life changes such as divorce, shifts in business profitability, or the death of a stakeholder.
A Key Prerequisite: Valuing Your Business
Before you can build an effective succession plan, you need an accurate valuation of your business. This figure is the foundation for nearly every decision that follows, from tax planning to structuring a buy-sell agreement.
Business Succession Planning for Small Businesses and Family Businesses
Business succession planning is a complex exercise involving a detailed set of tax rules and regulations. This is true whether you’re planning a small business succession or a larger family business succession involving multiple heirs.
Before moving forward, it’s worth working with legal and tax professionals who are familiar with the process. If you’re a business owner in Fort Myers, Florida or elsewhere, a fee-only fiduciary financial planner can also help coordinate your succession plan with your broader estate and retirement goals.
Frequently Asked Questions
What is business succession planning?
Business succession planning is the process of preparing for the transfer of a business’s ownership and leadership, typically due to retirement, death, or disability of the owner. It involves identifying goals, choosing the right legal and financial tools, and implementing a strategy to protect the business’s value and the owner’s wishes.
Why do so few family businesses have a succession plan?
Many small business owners are focused on the daily demands of running their companies and simply don’t prioritize succession planning until it becomes urgent — despite the fact that 57% of family businesses lack a formal plan.¹
What is a buy-sell agreement?
A buy-sell agreement is a legal contract that outlines what happens to a business owner’s share of the company if they die, become disabled, or leave the business. It’s one of the most common tools used in a business succession strategy.
How does business succession planning affect taxes?
Estate taxes may be due after a business owner’s death — typically within nine months, and payable in cash.² A proactive business succession tax planning strategy can help manage this liability, along with other costs like probate and administration fees.
What’s the first step in creating a business succession plan?
The first step is identifying your goals — including your desired income, level of future involvement, and legacy priorities — before choosing the tools and strategies to achieve them.
Do I need a business valuation before starting succession planning?
Yes. Valuing your business is a fundamental prerequisite to business succession planning, since it informs tax planning, buy-sell agreement terms, and how ownership will be transferred.
- Conway Center for Family Business, 2019
- Typically, estate taxes are due nine months after the date of death and must be paid in cash. In addition to estate taxes, there may be other costs, including probate, final expenses, and administration fees.
This material is developed from sources believed to be providing accurate information. It is not intended as tax or legal advice and may not be used to avoid federal tax penalties. Please consult a legal or tax professional regarding your individual situation. The opinions expressed are for general information only and should not be considered a solicitation for the purchase or sale of any security.
