Owners frequently want the business to carry on after their retirement or death. Many owners do not come to a firm decision regarding what will become of the business after their exit. Instead, many believe they are “leaving their options open” as to whether they plan to transition the business to the next generation, sell to employees, or sell to a third party. Regrettably, this indecision could cause the demise of a lifetime’s worth of sweat and effort.
In the backs of their minds, business owners plan on using the sale of their business to fund their retirement. Whether through a planned sale or through succession to their children, they feel the business will provide for them after they have left active duty. Unfortunately, without a plan, they threaten not only their own financial independence during their Golden years, but also the livelihood of their families and their employees. Even though so many depend on a solid succession/exit plan, the other priorities of day-to-day business push succession planning to the back burner.
A comprehensive succession plan is not an event, but rather a process. As such, one of the biggest assets in a succession plan is time. Succession planning steps must be thought as parts of a complete progression rather than piecemealed, separate actions. None of the steps within a succession plan occur within a vacuum, and a deviation in any of the steps could end up costing ownership in the end.
Neglecting succession planning could result in any of the following:
- Excessive tax to the exiting owner
- Underfunding retirement needs of the ownership
- Unnecessary tax to the employees
- Needless tax to the heirs/successors
- Threat to the business as a going concern
Ultimately, absent a succession plan, a business owner could witness the demise of a lifetime’s worth investment of time and effort. Employing partial measures in the area of succession could be just as disastrous. Again, a solid succession plan involves a number of considerations and is a process rather than a single event.
Succession planning within the Strategic Tax Planning process examines the tax consequences associated with different options an owner may be considering upon his/her retirement. Within the Strategic Tax Planning process, succession planning steps can commence even if the anticipated day of retirement may be years away. Addressing succession as part of the Strategic Tax Plan arms business owners with the necessary tools to proactively fight tax and costs associated with succession as well as increase the business’ chance of survival to the next generation.