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Transferring Your Legacy

Business Succession Planning: Ensuring a Smooth Transition

24 Minute Read

Chuck Miller built his hardware supply business from scratch, and over four decades it became his life's work. He was a natural at making good, quick decisions and did well by staying abreast of market trends and trusting his instincts. Yet Chuck wasn't particularly patient or communicative, and he also wasn't great at planning for the future or delegating decision-making authority.

So, when he died of a heart attack, at age 63, his wife and three 30-something children were ill prepared to deal with the business. There had been no succession planning or discussions about next-generation business ownership. The oldest son, Jack, was content following his passion of performing music. The middle child, Jim, was delighted drifting from jobs at ski resorts in the winter to beachside bartending in the warmer months. And Janet, the youngest, was enjoying a hectic but rewarding life as a grade-school teacher and mother of two.

With no business succession plan, no grooming of the next generation and no interest among any of them in taking over the successful yet demanding business, the family was forced to sell the company Chuck built, and not for a great price.


Years of Preparation

As the Millers' story illustrates, lack of proper planning can lead to failure when either passing your business to the next generation or selling to new owners outside the family.

Instead of an orderly, smooth, successful transition, an inadequate succession plan can lead to family infighting over control of the business, an inability to address tough global competition or a substantial loss of value in the case of a forced business sale to outsiders.

Leaving your business in capable hands can take years of forethought, planning, grooming and communication. Unfortunately, far too few of today's owners are taking the time to undertake the recommended strategic preparation in advance of their intended departure from the business.

"A critical problem for many small business owners is their identity is wrapped up in the business," says Charity Falls, Head of Wealth Planning at Union Bank. "Their business and personal lives are so closely tied together, and many are afraid of losing control and letting go."

Many business owners simply don’t have a succession plan. This lack of preparation is a major reason why only 30% of family businesses survive into the second generation, only 12% are still viable into the third generation, and only about 3% operate into the fourth generation or beyond.

There's much more to passing on a family business than merely transferring ownership. There are matters affecting operational control, aligning business and personal goals and accommodating the often-disparate needs and interests of one's heirs. Structural considerations can also dramatically affect the value of one's estate and the related taxes.


The succession planning process

There is no "one-size-fits-all" when it comes to succession planning. Every business and family situation calls for its own tailored approach. But there are common steps business owners can take to establish a succession plan. These key steps are relevant to almost all family businesses and can help create a viable succession plan—one that provides financial independence for retiring owners, the transfer of ownership and control and the continued growth and success of the business.

Setting goals

The first step to establish an effective succession plan is to set specific objectives. Ask yourself: What should the plan accomplish? Communicate your collective vision for the business and for the family. Decide whether you want the business to continue to be family-owned and managed. Equate your estate by transferring ownership of your business to heirs who will actively be involved in the operations and other assets to your other heirs. Also, as a retiring owner, structure your exit from the business in a way to achieve your retirement goals and cash flow needs.

Not aligning these critical goals will likely lead to future disputes, so make sure to involve the entire family in an open and frank discussion about business succession. Don't be afraid of arguments and disagreements. Falls says airing out any grievances early on can be healthy and lead to productive and beneficial planning.



George and Sarah run a thriving video production company. Their youngest son, Andrew, is active in the business, while their other two boys are not. They'd like their children to be treated equally, but they also want to reward Andrew's commitment to the business. They realize dividing the business in equal proportions would be unfair to all three children, especially Andrew, who would be beholden to his brothers for life. Working with a wealth strategist and soliciting input from all three children, they decided to leave the business to Andrew and to set up a second-to-die life insurance policy which, together with their non-business assets, would be left to their other two children. The elegant solution will ensure a continuation and smooth transition of the business, while affording equitable treatment to all three children.


Finding and grooming successors

A good succession plan will not just identify who runs the business but will also define active and non-active roles and the reporting structure of senior management. What's more, it should establish a decision-making process and a method for resolving disputes. This is particularly important for larger businesses and those where multiple family members will be involved.

While many business owners envision children or heirs as future managers, they should also consider the option of bringing in professional management. Again, an open and frank dialogue between all parties is critical to the future success of the business.

A lack of professionalism or thoroughness can be a death knell for a family business. If you plan to keep the business in the family, grooming the next generation of leadership should begin many years in advance of the transition.

"Start by building an understanding of the business among your children at a young age," Falls advises. "They can develop a strong work ethic by gaining experience working outside of the business, and they can develop a leadership mindset by participating in leadership activities at school."

If you plan to sell the business to a non-family member, limiting the number of relatives in important management roles will make it more attractive.


Integrating your estate plan

A business is often an owner's largest asset. Accordingly, a succession plan should be an integral part of an owner's estate plan. Consider the tax implications upon sale or transfer of ownership, death or divorce. Consider which structure or strategy might best suit your needs and minimize taxes before the time of sale. For estate planning, you should solicit expert legal and professional advice.


Documenting and communicating your objectives

Once you've determined a succession plan, you should put it in writing. While all the structural aspects will need to be detailed in legal documents, you should also share the plan with heirs and make sure all are aware of the terms. The more buy-in you get from all parties, the less likely there will be disputes down the road.


Creating a transition strategy

A comprehensive succession plan typically incorporates a transition plan whereby ownership and control don't simply switch upon the death of the owner, but transition over a period of time. This plan can phase in the successor based on milestones.

Transfer Strategies

While there are numerous ways to transfer a business, the legal structure of the business and method of transfer are the cornerstones of a succession plan. Below are different tools you can use, separately or in combination, to accomplish your objectives:

Buy-sell agreement: A powerful tool used to transfer ownership and provide for the orderly succession of a business, a buy-sell agreement allows the business owner to enter into a pact that provides for the future sale of his or her interest, following death, disability or retirement. Such an agreement also ensures control over the business by the surviving or remaining owners and can help to establish the value of the business interest for estate tax purposes.

Employee Stock Ownership Plan (ESOP): An ESOP is a qualified defined contribution employee benefit plan that is designed to invest in the stock of the sponsoring company while providing tax advantages to both employee and company owners. The company can make tax-deductible contributions to the ESOP that are used to purchase company stock. Owners selling stock to the ESOP benefit by deferring tax on the sale of their stock. Generally, there is no out-of-pocket cost to employees and growth in the stock value is tax deferred. Owners can decide how much and how fast they wish to liquidate their stock, subject to IRS limitations on qualified payroll and maximum annual percentage of qualified payroll.

Trusts: Trusts can be used to provide continued income to the business owner and his or her spouse. Any kind of property can be transferred to a trust, including a business. After the life of the trust, the assets can be distributed to beneficiaries such as family members, charitable organizations or others. There are many different types of trusts that can allow the owner to retain a certain amount of control over the business and provide a vehicle for succession.

Gifting: An owner may make lifetime gifts of business interests to reduce estate taxes and transfer ownership to family members. Typically, assets are removed from the taxable estate and gifted over a period of years. Gifts valued at $15,000 per beneficiary per year are tax-free and reduce the taxable estate.

Often, owners will gift non-voting shares in order to maintain control. Such shares may be entitled to a minority/lack of control discount.

Life insurance: Life insurance can serve several purposes in a succession plan. It is frequently used as a funding mechanism for paying estate taxes, as business interests usually cannot be readily liquidated. It can also be used to equalize an estate—providing children who are not involved in the business with an equitable inheritance. In addition, life insurance can be used to provide a hedge against the business owner's premature death.

Succession Planning Pitfalls

Even businesses with succession plans may encounter hazards that can derail well-constructed strategies. Below are some snags that business owners often encounter when transitioning their business to the next generation.

Waiting too long

If you want to pass your family business along to the next generation, putting off business succession planning is the worst thing you can do. Many business owners are so intensely focused on running their day-to-day business that future planning takes a back seat. They procrastinate until a crisis occurs, or they superficially cobble together a plan that fails to address many succession issues and stakeholder concerns. Starting to plan a decade or more before the intended transition date is a good idea, especially with the tendency for many owners to have a tough time letting go.

Fearing the loss of control

Many entrepreneurs fear succession planning will require relinquishing control of the company they've spent their lives building. But the opposite is true: A well-designed, properly implemented plan can ensure the business owner maintains control, both now and in the future.



The Hanford Company was founded and jointly owned by two brothers, Charles and Graham. Upon Graham's unexpected death, Charles was forced to execute a buy-sell agreement the brothers had put in place 10 years earlier. Unfortunately, the outdated agreement provided for Graham's estate to receive an amount that far exceeded the actual market value of the business, which had declined in recent years. The company did not have sufficient liquidity to pay off Graham's estate, and Charles was forced to liquidate a portion of the business and obtain a business loan just to meet the obligation.


Not preparing the next generation of management

Running a business is not an intrinsic skill. Even the most enthusiastic and devoted successors need to be exposed to the leadership and ownership issues they will likely face in the future. A family business succession plan will have a higher likelihood of success if the senior generation works with its successors for an extended period of time to develop the requisite skills before the transfer of control.

The consequences of a lack of proper grooming and training of the next generation can lead to a sense of entitlement, notes Falls.

You want to make sure you're promoting fairness in your organization. That gets around nepotism, which is a problem and ties in with entitlement. If you have nepotism, you could have difficulties attracting desirable outside talent. Different thinking and perspective from outsiders can be an enormous advantage. Nepotism and entitlement are the enemies of business succession.

Charity Falls, Head of Wealth Planning at Union Bank


Family Business Succession Planning - Generational Survival
Source: Family Business Institute



Dividing business equally among participating and non-participating heirs

Attempting to treat children equally with regard to management, leadership and ultimately control of the business can be a fool-hardy proposition. In most families, children differ widely as to their interest in the business, career motivations and management capabilities. Recognizing this and having a well understood agreement with input from all family members far in advance can lead to a harmonious and successful business transition.


Not documenting the terms of succession

A succession plan is only as good as the formal documentation of the plan. The best planned succession can fall apart unless it's specific terms — including successor roles — are specified clearly in writing.


Allowing a plan to become stale

Businesses change. Roles change. People change. An outdated succession plan can prove a liability if the terms do not address changing circumstances.



Dennis founded and built a leasing company that catered to the construction industry. He is single and has one son who is not involved in the business. Dennis' estate plan provided adequately for his son with non-business assets and life insurance. He sought a business succession plan where he would continue working and taking income from the company but slowly transition the company to his five long-term employees. He looked at several options, including an ESOP, but since he really only wanted to benefit a handful of employees, the ESOP didn't make sense. Working with his wealth strategist, his CPA and attorney, Dennis put together a program to provide bonus stock to certain employees over a scheduled time period, allowing him to retain majority control and eventually transition into a long-term consulting contract.

Key Ingredients of a Successful Plan

The successful transition of a business to future generations depends on a number of elements. The legal structure must suit the strategy. The strategy must address the sometimes disparate interests of heirs. And the successors have to be prepared and able to carry on the business. While a comprehensive plan will address these and other points, below are five best practices business owners can follow as they plan their succession.

1.  Involve family in discussion and encourage input

Deciding on your own succession plan in isolation and then announcing it is the surest way to foment disagreement. If family or other heirs don't agree with its terms or have input in the process, the plan stands little chance of success. Create an open dialogue among family members to begin the process. Pay close attention to the personal feelings and expectations of everyone concerned, as well as the goals of the business. Having such discussions is also a good way to identify potential conflict areas up front.

2.  Choose business successors wisely

Just because a child is your child doesn't mean he or she is qualified or interested in leading your business. Examine the strengths of all possible successors as objectively as possible and think about what's best for the business. Also, determine if they're really interested in taking on this role. Objectively assess whether a non-family member may be a better fit.

Keep in mind that management and ownership are different business succession planning issues. A well-structured plan will address both.

3.  Don't forget your customers, suppliers and business partners

Keep in mind that doing the right thing may not be only what you want. Consider the needs of your customers, suppliers and business partners. Be ready to consider delayed retirement if your key customers or other relationships require you before your intended transition.



When asked why they don't have a succession plan in place, business-owner respondents gave the following reasons:

  • I don't have the time required to deal with the issue.
  • It's too early to plan for succession.
  • I can't find adequate advice/tools to start.
  • It's too complex.
  • I don't want to think about leaving.
  • There is too much conflict with family or employees.

4.  Define your role and exit strategy

Succession planning starts with determining your personal goals. How and when will you transfer control? What role do you foresee yourself playing in the transition process? How will you be compensated, before and after you retire? A succession plan should spell out the specific terms of your exit and retirement and what you will expect from the business once it is managed by others. And keep in mind that transferring ownership doesn't necessarily mean relinquishing control.

5.  Start early

It's never too early to formulate a succession plan. A thoughtfully constructed succession process can take several years. Entrepreneurs looking for funding may want to build an exit strategy into their business plan from the start. The longer you spend on succession planning, the smoother the transition process will likely be. Commit to revisiting the plan periodically to make sure it remains relevant to your current needs.

6.  Assemble a trusted team of advisors

A succession plan can involve a change in legal entity, a recapitalization, reorganization or even a future sale of the business. Virtually any plan will involve legal and financial aspects that demand the expertise of a business lawyer and accountant. When choosing advisors, make sure they have a full understanding not just of the business aspects but also of the personal and emotional context in which succession planning takes place. This is where an experienced wealth strategist can be particularly useful, guiding you through the process and providing invaluable insight and coordination with your team.


Your financial partner for life

You've worked hard during your lifetime to build your business and undoubtedly want to ensure the preservation of your legacy. The Private Bank can help. Drawing on a tradition of excellence, personalized service, discretion and respected investment experience, our highly specialized and experienced wealth strategists can help you navigate the complexities of succession planning. Our specialists will work with you to understand your unique situation, and make customized recommendations and actually implement them. Take the next step and discover how we can help you protect the wealth you've worked so hard to build.

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Wills, trusts, foundations, and wealth-planning strategies have legal, tax, accounting, and other implications. Clients should consult a legal or tax advisor. Union Bank does not create estate plans. Estate plans should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in a client’s state.

This material is intended solely for informational and educational purposes, and is not intended for use as the basis for legal or tax advice or to be considered an opinion and does not contain a full description of all facts or a complete exposition and analysis of all relevant circumstances.

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