As a business owner, you have spent your career focused on cash flow, meeting and exceeding customer demands, and managing your employees. But it’s also important to consider what will happen to your business as you enter the next phase, whether that’s turning over day-to-day operations, stepping back from a leadership role, transferring ownership to the next generation of your family, retirement, or the sale of your business to a third party.
Yet many small and mid-sized businesses fail to address the changes in ownership that are necessary to ensure the continued success of the business. A successful business succession plan can help your business retain its value in the event of unexpected circumstances and is a key component to planning for the future and minimizing tax consequences while focusing on strategic planning from a business and financial perspective. A thoughtfully-prepared business succession plan is a key part of both strategic and financial planning for the business, as well as part of the estate plan of the business owner(s).
Succession Planning: Choosing a Business Successor
Choosing the next generation of leaders for your business is one of the most important factors when considering business succession planning.
In the case of many family businesses, the line of succession is clear. Other times, such as when the owner(s) children are not involved in the business or lack the requisite skill to lead the business into the future, the business owner(s) will need to choose a business successor. This may be a family member, a business partner, a rising star in the operation, or a third-party purchaser.
Regardless of who you choose, you will need to evaluate their strengths and weaknesses, ensure that they want to take over the business, and put in place a process that will help ensure a smooth transition.
An experienced business succession attorney can help you evaluate what you and your family need, as well as the leadership attributes that will ensure the continued success of the business to best meet your goals.
Choice of Entity Concerns
The nuts and bolts of a successful business succession plan will depend on the nature of the business, the way it is structured, its size, and who the successor owner will be.
If your business was set up as a C-Corporation or an S-Corporation, ownership interest is based on the number of shares owned. If you want to leave the business, the successor business owners will need to buy out your shares. There will be different tax implications if your business is a C-Corporation or an S-Corporation.
If you have a business partnership, a buy-sell agreement is often the best way to transfer ownership of the business.
If your business was set up as a Limited Liability Company (LLC), each member owns a percentage of the company and ownership will transfer like a partnership.
At RKPT, our lawyers can evaluate your business arrangement and prepare a buy-sell agreement that will effectuate the sale of your business to the new owner.
Using Buy-Sell Agreements and Trusts to Ensure a Smooth Transfer of Business Ownership
A buy-sell agreement is often used to control how business ownership will be transferred. It can specify:
Who can buy an ownership interest in the business
What happens when a business owner decides to leave
A fair price for the business
How business ownership will transfer in the event of the death or incapacity of one of the owners
Our lawyers can also address the estate planning issues that arise when ownership of a business transfers. This is often accomplished through the use of estate planning tools such as trusts and other testamentary documents.
The Importance of Business Valuation in Transfer of Ownership
In any transfer of business ownership, it is necessary to establish the value of the business. This often requires a business appraisal by a CPA or other business valuation professional. Other times, the current and successor owners will simply agree on the value of the business. Regardless of how the business value is calculated, this information will be necessary to ensure that a business owner’s estate planning needs are met and that the business will continue to operate and grow.
Ohio Business Succession Planning Lawyers
An effective business succession plan is not a one-time event; instead, it is a multi-step process. The knowledgeable and experienced business succession attorneys at RKPT can evaluate your business and your needs, help identify a successor, and put in place a plan that will ensure that your personal financial needs, as well as those of the business, are addressed in a cost-effective way. Our lawyers can help minimize tax liability, prepare the appropriate documents to ensure a successful business transition, and provide advice to see you and your business through a successful transition.
