Financial Considerations of a Succession Plan

Financial Considerations of a Succession Plan

One should seek the help of a CPA when evaluating the financial considerations of a succession plan. 

Succession Plan Must Address Financial and Tax Issues

Without a funded succession plan any approach can be tenuous.


Three Basic Approaches

  1. 1.    Sale
  2. 2.    Gift/Will                                                  
  3. 3.    Liquidation


Liquidation is Least Advantageous

q  Business being dissolved, fewer dollars received than from the business as a going concern.


q  Dollars come from the value of tangible assets.               

q  Nothing is received for the value of the ongoing enterprise.

q  Usually only taken where there is little likelihood of sale/no heirs to take over the business.


q  Wherever possible, owner should have alternative resources for retirement as the liquidation value may prove insufficient.


Potential Buyers of the Business

q  Co-owners.

q  Family members (who also might receive shares as gifts).      

q  Third party/competitors.

q  Employees


Methods Used to Sell the Business

q  Cash.

q  One time payment or installments;

q  Generally, dollars come from the business or from buyer’s assets or salary.

q  Borrowed funds.

  1. 1.    effect same as cash to seller;
  2. 2.    buyer must pay interest to a lender (as opposed to interest to the seller under an installment sale).   

q  Sinking fund.

  1. 1.    dollars set aside in investment account, allowed to grow.
  2. 2.    avoids interest payments with borrowed funds or installment sale.
  3. 3.    asset growth taxable/may be insufficient in the event of a premature sale (due to death, disability, etc.).

q  Insurance.

  1. 1.    premium payments can take the place of a sinking fund;
  2. 2.    can be permanent or term insurance;
  3. 3.    permanent insurance provides tax deferred cash value growth
  4. 4.    cash value can be used for a down payment;
  5. 5.    “self completing” in the event of a premature death;
  6. 6.    disability income buyout can handle disability issues.


Buy Sell Agreements Take Two Basic Approaches

q  Cross Purchase

q  Redemption Choosing correct approach involves:

  1. 1.    specific company/owner needs/goals;
  2. 2.    income tax consequences;
  3. 3.    gift/estate tax consequences;
  4. 4.    alternative minimum tax.


Gifting/Willing a Business in Family Situations

q  Relative may need to buy out parent to ensure parent retirement funds.

q  When parents can afford to gift/will the business to their child they must consider several items:

  1. 1.    the parent will often try to balance inheritance received by children not involved in the business;
  2. 2.    are there sufficient assets to do so;
  3. 3.    is there a need to “create” an estate to will to those children;
  4. 4.    often done with insurance options.

q  Businesses often large illiquid assets/difficult to sell before estate taxes are due.

q  Insurance can handle estate taxes/allow less pressured sale.

q  Option to wait until death and will the business.             

q  Raises issues related to retaining control (and management) if the older generation keeps control of the business interest.