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Succession & Retirement Planning

Succession & Retirement Planning


Business Succession

There are many elements of a business-succession strategy. The details are different for each business, but the basics are the same. The most important thing is for the owner to acknowledge that at some point he/she will leave the business, through retirement, sale of the business or death/disability. At that point, someone else takes over, or the business has to be sold or liquidated. This can be a smooth transition or a bumpy disaster. If no succession planning is done, the IRS, heirs, lawyers and any co-owners will take over. This is when businesses get sold at "fire sales" or simply fade into oblivion. To avoid this, our advisors can assist in developing a plan to assist in the successful transfer of your business. Some of the questions that must be answered include:

  • When owners want to leave the business
  • How owners want to leave the business
  • To whom they want to leave or sell the business
  • How to fund transfers, sales, retirements and disability
  • How to avoid family discord
  • The key questions

The exit strategy is the most important element and the one business owners are often least willing to think or talk about. Often they see the business as an extension of themselves. To step back and devise a means to retire, transfer, sell or terminate the business is not something the business owner wants to do.

A key question to ask the business owner is, "Who do you envision running the business when you are no longer willing or able to do so?" Follow this question with, "Do you want to be in business with your ex-wife? Your co-owner's adult children? The new husband of your daughter?" Without adequate succession planning, any of these scenarios is a very real possibility.

Another question to ask is, "Where do you see yourself in five, 10 or 20 years?" Follow this with, "How do you envision reaching that goal? Where will the money come from?" Frankly, unless business owners begin grooming their heirs to take over years in advance of the expected transition, the heirs are very unlikely to be competent to run the business. Matters are complicated further when heirs have no interest in running the business. Since a business is often a large part of the owner's estate, the heirs lose much of their inheritance if there is no orderly transition plan in place. Even worse, many small businesses can't be passed to the heirs unless the heirs are licensed or otherwise qualified to own or participate in the business.

Key planning elements

Succession strategies include a number of things. The main ones are:

  • A shareholder/partnership agreement and/or
  • A buy-sell agreement
  • A means to fund the agreement(s)
  • A shareholder/partnership agreement is a key document that details the need for a buy/sell agreement, and excludes ex-spouses of owners, (ex)spouses of the owners' children and others from demanding a share of the business interest. This exclusion is critical in the event of a divorce, since the ruin of a successful business often comes in the guise of a demand from the (ex)spouse for a share of the business or a portion of its revenues. Having a properly executed shareholder/partnership agreement, signed by the owners, spouses and other parties (such as adult children), eliminates many potential succession problems.

Our Solution

A properly planned and executed business succession strategy coordinated by a PFC advisor can provide for this very important element of a successful business owners life.