• February 2015 Estate Planning Update: Business Succession Planning
  • February 18, 2015
  • Law Firm: Gordon Silver - Las Vegas Office
  • According to the Family Business Institute, only 30% of family businesses survive beyond the founder’s generation.[1] During the next two decades, nearly 80 million baby boomers will retire and at the same time many will receive inheritances. It has been estimated that over $10 trillion will be transferred from the World War II generation to the boomers, which will be the largest intergenerational transfer of wealth in history.[2] A large portion of this wealth is comprised of privately-owned family businesses.

    The numbers encompassing family businesses are quite impressive. Family-owned businesses are the foundation of the American economy, and a significant part of America's wealth lies within them. Family businesses comprise 50% of U.S. gross domestic product, generate 60% of the country's employment, and account for 78% of all new job creation.[3]

    Proper business succession planning, in conjunction with estate planning, is key to ensure that a business survives for generations ahead.

    A business succession plan focuses on three main issues: ownership of the company, management transition, and tax planning. The specifics of how these will be addressed depend on the size and structure of the company. Typically the plan involves creating some type of buy-sell agreement:

    Types of Buy-Sell Agreements

    Cross-Purchase Agreement

    Allows the partners or stockholders to purchase each other’s shares upon disability, retirement, death or some other triggering event.  This style of agreement works well for partnerships and smaller corporations with up to three owners.         

    Stock-Redemption Agreement

    Allows owners to sell their ownership interest back to the company in the event of incapacity, retirement or other triggering event. If an owner dies, their estate is required to sell the deceased owner’s interest back to the company.  This type of agreement works well for larger companies with four or more owners.

    Wait-and-See Agreement

    A hybrid type of agreement that allows the owners to delay the selection of a stock-redemption plan or a cross-purchase plan until the occurrence of a triggering event. 

    Estate and business planning go hand in hand as the business may be the largest asset in the family’s estate. A family business owner must have an estate and business plan - ideally created by the same advisor - to fully achieve desired goals and increase the odds of the business prospering for the generation ahead.
    The estate plan is about the business owner as an individual and should be designed to protect the owner in the event of incapacity during life, as well as planning for death. The personal estate plan will be the vehicle to transfer the ownership of the business. The business succession plan will be the vehicle to coordinate transfers of ownership amongst multiple members as well as management transition. Tax considerations affect both plans.

    The success of the family - and its business - depends on integrated estate and business planning. It’s never too early to start planning to protect and preserve the legacy of the family business for future generations.

    [1] Gardella, A. (2012, April 4). Family Businesses Learn to Adapt to Keep Thriving. The New York Times. Retrieved from http://www.nytimes.com/2012/04/05/business/smallbusiness/how-they-beat-the-odds-to-keep-family-businesses-healthy.html?pagewanted=all&&under;r=0.

    [2] NFIB | Small Business Association > Business Resources > Business Resources Item. (n.d.). NFIB - National Federation of Independent Business - Small Business Association. Retrieved from http://www.nfib.com/business-resources/business-resources-item?cmsid=29078.

    [3] Perman, S. (2006, February 13). Taking the Pulse of Family Business. Bloomberg Businessweek. Retrieved from http://www.businessweek.com/stories/2006-02-13/taking-the-pulse-of-family-businessbusinessweek-business-news-stock-market-and-financial-advice.