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Business Succession Planning


Good business succession planning is about being ready for change.

It involves planning for the smooth continuation and success of a business in the face of new ownership or key management. It is related to personal wealth succession planning insofar as its primary objective is preservation (and enhancement) of rights and properties in transition from one class of persons to another; however, it differs to the extent that business objectives might differ from personal objectives.

Without succession planning, a business that has become successful can easily fall. The business grows because there is a leader (often the owner) with experience, drive and ability. Once that leader is gone, the entire business will be vulnerable if the wrong people take control of the business at the wrong time. This vulnerability extends from both the possible inexperience of the new leaders, and also from the varying possible agendas of various stakeholders, who will try to push the company this way and that.

Thus good business succession planning has two main goals:

  • To ensure effective management of the business after the succession; and
  • To maximize stakeholder agreement in the succession.

In attending to these goals, there are two main planning options:

  • Retention planning, which is a plan under which the business remains owned or controlled by the family circle; and
  • Buy-sell planning, which is a plan under which ownership or control of the business is sold to other business associates, key employees, or interested outsiders.

The successful family business will often want to plan to keep the business in the family. In doing so, there are a number of complex issues to be addressed. Such issues include:

  • Should the company stock be controlled through a family trust?
  • When should voting control of the company be passed to the children or grandchildren?
  • What types of rights should be retained by the founding (or previous) generation, and for how long?
  • What is the primary mission and objective of the company, and has it been set out in a clear company policy?
  • How can the involved parties reduce their tax burden on the transfer of ownership?

Often, shares in a closely-held family-run company will be re-organized in what is referred to as an ‘estate freeze’. An estate freeze is a tax-preferred transaction in which the value of certain shares in the company is ‘frozen’ (i.e. limited to the value in effect at the time the freeze is implemented), while future growth in the company accrues to an additional class of shares. The purpose of the estate freeze is generally to cap or limit the value of assets or shares in the hands of the first generation so that capital gains taxes on death will be limited to being based on the existing value of the company.

The estate freeze is just one tool available in good succession planning.

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