The Importance of a Succession Plan

Succession planning for any business, especially a small privately-owned business, is crucial.  You probably know of at least one business that closed not long after the founder or a key employee fell ill or passed away unexpectedly.  This may have happened despite the business having a long list of satisfied customers and decades of goodwill built up in its community.

I have never met a business owner who didn’t want his or her business to continue to thrive after they were gone.  The first and most important step in the succession planning process is acknowledging that there will come a time when the owner or a key employee will no longer be there.  If appropriate steps haven’t been taken, there is a high probability the business won’t survive that transition.  While no succession plan will be the same, here are some things all business owners should consider:

  1. Will the Business Pass to the Right Person or People?

Consider the case of the sole business owner who is married with three kids.  The oldest child is an executive employee of the business with a longstanding relationship with important customers and suppliers.  Meanwhile, the spouse has never been particularly involved with the business nor have the other two children, who live in different states.  A “typical” estate plan may leave everything to the spouse, or if the spouse is pre-deceased, leave the business outright in equal shares to the three kids.  Is that really the best plan for this estate/business?

  1. Would a Trust be Beneficial?

A trust can help accomplish several different goals when it comes to succession planning.  First, it would keep the succession private.  Using only a will would mean that the transfer of ownership interests (and any other succession terms) would have to be done under court supervision and would be publicly available information.  A trust also gives the business owner flexibility to name a successor trustee who may be better capable of managing the business than the owner’s loved ones.  Putting the business into a trust would allow beneficiaries to receive income from the business while not having to be involved with its operation if they aren’t interested or suited for it.

  1. Is there a Shareholder/LLC Agreement?

A business should have a shareholder/LLC agreement if there are multiple owners.  This agreement is important for business succession purposes because, among other things, it can qualify how an ownership interest will pass upon the death or incapacity of an owner.  For example, a shareholder agreement can give the remaining owners the right to buy out their deceased partner’s ownership interest (at fair market value or a predetermined price) before it passes to his or her heirs.  It can also provide that, in the event the ownership interest does pass to the deceased owner’s heirs, that the interest becomes non-voting.  This can help keep control of the business in the best hands for continued success.

  1. What is the Tax Impact?

Finally, thought should be given to the potential tax consequences of transferring ownership of the business. A Family Limited Partnership (FLP) can be very useful in transferring business interests to family members while minimizing the tax impact.  Factors such as the current value, cost basis, and phase in the business’s life cycle could also determine whether lifetime transfers or testamentary transfers are better from a tax perspective.

Please don’t hesitate to contact the Stillman Bank Trust & Wealth Management Department if you’d like to discuss your business succession plan.

J. Joseph McCoy, JD – Trust Officer

Opinions expressed are solely my own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Wealth Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal.

Note: This blog post originally ran as a guest columnist article in the January 2023 issue of The Voice, a Rockford Chamber of Commerce publication. To read the issue in its entirety, click the link below. 

The Voice | January 2023 Issue