Consider a family with two children. The eldest is interested in taking over the business, while the youngest has their own career. Is succession as simple as transferring ownership to the eldest? Or do owners need to consider selling a portion of the business to someone else and then providing this money to their younger child? Does the potential
make take steps to limit the scope of influence and responsibility held by the new buyer. If you push back on these steps, it could create a culture of anger and resentment that ultimately undermines the business and makes it harder for your succession plans to occur as intended. To help avoid this issue, start a conversation with your partners when you first start thinking about succession. Talk to them about your plans post-business, who you might want to hire as your successor, and what that looks like for them. This makes it possible to draft documentation that benefits you, your partners and your incoming purchaser before the changeover happens, rather than scrambling to put something in place as the sale of shares is underway.
have to expertly plan, the better your chances of creating a succession plan that lives up to your legacy expectations.
the outcome. Consequences range from immediate payment of outstanding taxes to payments plus significant penalties. To navigate this pitfall successfully, it’s best to engage professional help. Given the number of potential taxes—and tax exemptions—that could apply in your specific case, it’s worth taking the time to sit down
Focusing on the short term The interconnected nature of succession
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planning makes it easy to focus on the short-term, including the challenges that are right in front of you, rather than the longer-term consequences of the decisions you make. Consider a basic business transition that sees ownership transferring from X to Y, from you to a family member or a partner. Simple, right? Potentially too simple. Instead, you might want to consider an installment approach that sees the next generation of owners paying for the purchase of the business by using sales revenue. You could also include a default clause that sees ownership returning to you or a third party if the new owners aren’t able to keep the business afloat or can’t make their installment payments over time. Taking a long-term approach to succession planning provides a more holistic view of how your decisions now could impact both the business itself and the members of your family as they take ownership roles or remain on-site to help new owners navigate key challenges.
revenue of the business necessitate this kind of balance? Or does the stress that comes with owning the business offset the notion of the youngest receiving any compensation? This can get even more complicated with extended families. When aunts, uncles, cousins, nephews, nieces and in-laws are involved, does everyone who has worked at or alongside the business
On paper, the idea of business succession often seems simple, especially if you have children. However, the choice of a successor (or successors) can
with a tax expert and understand exactly what taxes will apply and how much they will cost when you sell the
business. These professionals can also offer advice about how best to structure and sell your business to minimize the tax impact you face. Staying the course Your legacy is more than just what you leave behind. It’s a testament to the work you’ve done and will continue to do even as your role in the company shifts. After investing so much of your time—and yourself— into the business, it’s critical to stay the course, to ensure that the legacy you want to leave is the one that comes to fruition. In summary, keep your legacy plans on track by planning for common missteps. Instead of waiting to see what happens and dealing with the consequences as they arise, make sure you’re prepared with a clear vision statement and a business structure that supports what you’re trying to do. Keep both family and current business partners in mind when making your decisions, and play the long game when it comes to both preparation and execution. Finally, always assume the worst when it comes to taxes. Plan for potential problems at local, state and federal levels to ensure you’re not surprised when the succession process starts in earnest.
Waiting until the last minute This ties into our next pitfall: Waiting too long
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to start your succession planning. Ideally, you want to start planning the moment you start thinking seriously about leaving. Why? Because over time, your succession plans may change. For example, you might find yourself burnt out and wanting a change, which leads to the notion that selling your business in its entirety and leaving everything behind is the right choice for you and your family. If you immediately put plans in place and make the change, you may find yourself regretting the decision six months or a year down the line once your burnout starts to fade and your passion for the business comes back. Reduce the risk of this pitfall by starting early and getting the help of experienced succession planning specialists, who, let’s face it, know this territory better than you do. Put simply, the more time you
cause significant familial conflict.
deserve some say in what happens next? Even if owners determine that a specific person is an ideal successor, will this lead to inter-family conflict? A recent study from the International Journal of Environmental Research and Public Health puts it simply: The uniqueness of family businesses, being the intertwining of the family and the business system, represents a double-edged sword for business families that strive for mental health at individual, family and business levels. Bottom line? Whenever possible,
Discounting tax complexity There are only two certainties in life — death
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and taxes. While business owners are often familiar with their tax obligations on a year-to-year basis, additional tax complexity arises when it comes to selling your business or initiating a transfer of ownership. In addition to state and federal tax laws, there may be international statutes that apply, depending on where your business operates, where your employees are located and where your revenue is primarily generated. Discounting this tax complexity can lead to serious problems. For example, if you’ve run the numbers and come up with a solid valuation for your business, found a buyer, and initiated the transaction, but then discover additional tax obligations, you could end up with significantly less money than predicted, in turn potentially impacting your post-succession plans. There’s also a worst-case scenario here: unintentional tax fraud. If you forget to file taxes for a specific succession action, even if you don’t realize that the law applies to you, you’re still responsible for
it’s better to address family concerns up front, rather than dealing with them after the fact.
Overlooking partner problems Another common misstep is 4
overlooking potential problems with other business owners. While in most cases you have the right to sell your shares to the person or company of your choice, it’s worth approaching this transition with caution. Why? If existing partners don’t like your choice of successor, they
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Disclosure: The information contained herein may not represent the views and opinions of California Bank & Trust, a division of Zions Bancorporation, N.A. or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal or business advice.
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IN YOUR CORNER ISSUE 14 | 2023
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