Business Succession Planning
Preserving the Value of Your Farm or Business for the Next Generation
Did you know that about 2/3 of all businesses do not have a plan to cover what will happen when the primary operator stops running things?
Is your business one of them?
Force yourself to think about what could happen if an emergency strikes and you were unable to manage the business. Would anyone be prepared to step in and take over the tasks needed to keep the business running profitably? There are likely to be disagreements about who should be in charge and what should happen. It might take court intervention to gain authority to manage the most basic tasks.
Soon, the business that you worked so hard to build could be virtually worthless. Your farm or business could become a liability to your family instead of an asset.
Don’t let that happen.
We Protect Farms and Businesses
Business succession planning involves developing plans to enable an enterprise to transition predictably when there is a change in leadership. At Huizenga Law, we offer planning services to protect families in a wide range of circumstances, and that includes families who run farms and operate closely-held businesses.
We can prepare a plan to preserve a business in case of emergency and also to allow for a smooth transition when you are ready to retire or want to cut back on daily involvement to give yourself time to enjoy other pursuits.
Goals in Business Succession
Why is business succession planning so important? Your business is not only a tremendously valuable asset, but it is also the product of your creativity and labor. Preserving your business allows your legacy to continue to benefit your family and community.
With the right plan, you and your loved ones will know:
- Who will step in to run the business. It could be a child, employee, or a third party buyer
- How your spouse and family will benefit financially from the business in the future
- How the value of the business will be established if full or partial interests will be sold
- How the business will transition to future generations
Every business is unique, so every plan for business succession will be different. Plans need to provide for voluntary transitions in leadership, such as for retirement, as well for emergencies that cause a sudden transition, such as if you have to step down immediately due to a health issue.
We start by identifying goals and assessing the current structure of the business. We look at the responsibilities, who handles them currently, and the roles played by individuals on staff. We review potential successors with you and their qualifications. If there is no potential family member or employee who might take on leadership, your plan might include preparing the business for eventual sale to outside investors.
Then the detailed planning begins. We consider all factors from financial arrangements and tax considerations to training needs, insurance coverage, and regulatory issues. Your plan should address:
Transfer of ownership: Who will purchase, how the business will be valued, and how the sale will be financed. This could include a buy-sell agreement.
Transfer of management: Who will take over day-to-day operating responsibilities? Employment contracts and non-compete agreements could be part of the transition.
Financial planning: How will the business remain stable during the transition? Plans need to ensure sufficient cash is available to fund objectives and cover debts. Strategies might include life insurance.
Estate planning: The business succession plan needs to coordinate with the owner’s estate plans. The owner also needs to have protection documents such as durable power of attorney to provide for decision-making authority in case of emergency.
Family and employee dynamics: How will key players interact? Will the hierarchy be clear and manageable? Alternate plans should be in place to cover vacancies if critical employees leave the organization during or after the transition.
Estate tax uncertainty: It is important to monitor changes in estate tax requirements and prepare plans to avoid liability that could force the family to sell the business.
Preparing for all of these factors is a challenge, but Huizenga Law has been helping families develop the right plans for their farms and businesses for years, and we understand how to make the process work for you.
Getting Down to Specifics: The Business Buy-Sell Agreement
Many business succession plans include a buy-sell agreement that provides for the transfer of business interests when a specific event occurs. Events that trigger operation of a buy-sell agreement often include retirement, disability, divorce, or death of the owner.
An interest in any form of business entity, corporation, partnership, or LLC can be transferred under a buy-sell agreement, and these agreements work well for businesses with multiple owners or an individual owner. As a contract, a buy-sell agreement is binding on third parties such as the estate representatives and heirs of the business owner. This feature can be invaluable when the business owner wants to ensure a smooth transition of complete control and ownership to the party that will keep the business going.
Subject to certain Family Attribution Rules under Internal Revenue Code §318, a buy-sell agreement can help establish a value for the business that is binding on the IRS for federal estate tax purposes as provided under Internal Revenue Code §2703.
We commonly structure buy-sell agreements in one of four general formats. With an entity buy-sell agreement, the business itself agrees to buy an owner’s interest. Under a cross-purchase buy-sell agreement, business owners agree to purchase each other’s interests if a triggering even occurs. With a “wait and see” buy-sell agreement, the entity usually has the first option to purchase an owner’s interest and if the entity does not exercise the option, the remaining business owners may purchase the interest.
Finally, when there is one business owner and the business will be sold to a third party, we would use a one-way buy-sell agreement.
Some common options to fund the purchase obligation under a buy-sell agreement include the use of personal funds, creating a sinking fund in the business itself, borrowing funds, setting up installment payments, and purchasing insurance. Since the use of an insurance policy can guarantee complete financing of the purchase from the beginning, buy-sell agreements often include both disability buy-out insurance and life insurance.
Work with Huizenga Law to Protect Your Business Legacy
Whether you pass your business on to future generations of your family or sell to partners, employees, or an outside buyer, having a plan for the eventual transition is essential to protect the viability of your business and the value to be passed on to your family.
The sooner you create a plan for business succession, the easier it will be to implement, and the greater the protection you will receive. Schedule a time to talk to Huizenga Law today about the best ways to protect your farm or business for the future.