Preparing for the long-term future of a business

Paul Rycroft

Here’s an important question for busy business owners – what’s next for your company? Not just tomorrow or even in the months ahead, but when the time comes that you or one of your key employees retires or leaves the organization unexpectedly?

At a time when many baby boomers are thinking about retirement, those who own a business need to plan not just for their life after work, but for the future of the firm they’ve committed so much of their lives to. In a small- or mid-sized business, the owner and perhaps other key personnel play such a vital role that special planning is required to prepare for circumstances in which any of these individuals is no longer part of the organization. If your business doesn’t have a succession plan in place, it is an issue that needs prompt attention.

There are a number of questions to consider in helping prepare for the period of transition a company inevitably faces. They include:

Question 1 – Who is in line to follow the principals of the firm?
The most fundamental aspect of a succession plan is to have a replacement (or replacements) in line. In many cases, a family business will move from one generation to the next. In other situations, a trusted employee or group of employees may need to be groomed and prepared to assume control of the company in the future.

Question 2 – How will control of the business be transferred?
Once successors are identified, there is a variety of ways that control of the business can be transferred to them. This usually works best when the current business owner and potential successors can establish an agreement in advance for an orderly transfer of ownership. This may occur in a number of ways. Among the options are:
• An outright sale to the new owner, either in a one-time transaction or an installment sale (with payments made by the buyer over a number of years). It may be possible to establish an annuity that will make payments to the owner over a period of years as a way to fund the sale.
• The use of a trust vehicle, such as a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT). GRAT/GRUTs are irrevocable trusts to which you transfer appreciating assets while retaining an income payment for a set period of time. At either the end of the payment period or your death, the assets in the trust pass to the other trust beneficiaries (the remainder beneficiaries). The value of the retained income is subtracted from the value of the property transferred to the trust (i.e., a share of the business), so if you live beyond the specified income period, the business may be ultimately transferred to the next generation at a reduced value for estate tax or gift tax purposes.

There are other options to consider as well. An important consideration in the decision-making process is the potential tax ramifications, particularly for the seller. There are tools available to help reduce the potential impact of capital gains, estate and gift taxes when a sale occurs. Good planning plays a critical role in making sure that both the seller and the buyer achieve the most favorable results.

Question 3 – What forms of protection are in place in case an unexpected event occurs?
The need to implement a succession plan can sometimes strike without notice. It is important to have protection solutions in place in the event of the sudden death or disability of the business owner or a key individual in the organization.

Businesses that involve partners or likely successors, for example, may benefit from having a buy-sell agreement in place. A buy-sell agreement lets you keep control of your interest until the occurrence of an event that the agreement specifies, such as your retirement, disability, or death. Other events like divorce can also be included as triggering events under a buy-sell agreement. When the triggering event occurs, the buyer is obligated to buy your interest from you or your estate at the fair market value. The buyer can be a person, a group (such as co-owners), or the business itself. Price and sale terms are prearranged, which eliminates the need for a fire sale if you become ill or when you die.
Remember, you are bound under a buy-sell agreement: You can't sell or give your business to anyone except the buyer named in the agreement without the buyer's consent. This could restrict your ability to reduce the size of your estate through lifetime gifts of your business interest, unless you carefully coordinate your estate planning goals with the terms of your buy-sell agreement.

Question 4 – If a plan is in place, are you keeping it up to date?
Like anything related to personal finance, no plan is a final plan. Things change in the lives of business owners and in the structure of the business. It is important to review a plan regularly and make appropriate adjustments to it.

Business succession is a complex matter. It involves close work with a financial advisor, tax specialist and an attorney experienced in these types of matters to structure a solution that is most suitable for your business and potential successors. It is a critical matter to address to assure that the rewards for years of hard work in building a successful business are realized long after you are no longer part of the day-to-day operations of the organization.

Paul F Rycroft, CRPC®, CPA Advisor is a financial advisor with Ameriprise Financial Services in Alice, 604 E. Second St.668-1212 or email at paul.f.rycroft@ampf.com and is licensed/registered to do business with U.S. residents only in the states of Texas, Oklahoma and New Mexico.

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