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Succession Planning for Small Business
- 1. Sucession Planning Venture Bank Small Business Series Presented by Jon R. Schindel
- 2. Succession Planning – What? • Succession Planning • Orderly transition of company ownership • Orderly transition of company governance; or not • Utilize Gift Tax Exemption during lifetime • Pass ownership in lieu of cash or other current gift to reduce taxable estate • $13,000 per person, per recipient in 2012 • Plan for purchase of company after owners’ death
- 3. Succession Planning – Who? • Business Owners • Closely held companies (family) • Future plan for company is to pass to next generation; as opposed to selling company • Planning is done by current owners • Involvement of next generation in making plan; inform or involve? • Either way, owners should understand intent/desires of next generation with regard to future involvement/aspirations
- 4. Succession Planning – When? • Triggers for Succession Planning • Thoughts of Retirement • Decision not to sell, and pass ownership to next generation is made • Children taking active role in the company • Children’s role in company becoming clear • Estate Planning taking place
- 5. Succession Planning – How? • Steps to a Succession Plan • Create Plan (lawyer/accountant/consultant) • Member/shareholder Buy/Sell Agreement • Funding Mechanisms; Insurance v. cash • Control during owner’s lifetime • Valuation of Company/Assets • Establish plan for ongoing gifting • Estate Planning (next slide)
- 6. Estate planning • Revocable/Living Trust • Avoids Probate • Company ownership passes quickly • Cost efficient • Beneficiary designations can be established based on succession plan • Estate Tax Planning • Lifetime Gifting of Ownership (discussed above) • Life Insurance Trust as alternative planning tool
- 7. Thank you Jon R. Schindel jschindel@seilerlaw.com (952)358-7406 www.seilerschindel.com
Editor's Notes
- I work primarily with small to mid size business owners and estate planning. Business succession = intersection. Focus today => next generation or internal sale to employees. You’re a business owner; outlive your spouse; what happens to your business without a succession or estate plan? If kids, then kids in equal shares. Never met a business that said “This is perfect”!!! Kids get along perfectly; equally involved in the company; they are the 3 muskateers (all for one and one for all). More likely that some are involved in the company, some have the apptitude and are truly interested. Some are not. SUCCESSION PLANNING avoids throwing them all in the pot together to figure it out . . . And ruin the company while doing so.
- Ensure estate planning; buy sell agreement and the succession plan work in harmony to achieve owners’ goals. Four main goals RE: next generation succession planning Orderly transition of company ownership; Decide who gets it At what price. This ensures continuity and survival of the company. (buy out of estate over time works with company’s cashflow requirements) Orderly transition of governance: business owner not ready to give up control; next gen not ready to take control. No all suited for control Some don’t want it. Utilize Gift Tax Exemption if estate tax eligible. $10M this year; this will come down. Set out a plan for purchase of ownership at death; if not accomplished during lifetime.
- Mentioned: focus today =>pass ownership to next gen or to key employees. Different type of planning if prepping for sale; need guy like Al and a broker for that assistance. Current owners initiate the plan and implement. Many come to me with no idea. Tough conversations. To struggle but implement a plan is better than no plan at all. Who is involved? Sometimes kids come along but they are delicate conversations. Next gen goals may differ from parents; or there are control issues. Ultimately, owner makes decision but not in a vacuum. Must know where next gen is at.
- Triggers Thoughts of retirement: Start early!!! Can take time to make critical decisions; get appraisals; implement documentation. Don’t keep putting it off. Especially if owners have estate tax planning issues; the sooner the better; start gifting. Next gen is beginning to define themselves with regard to business. Interested/not. Active role/not. Capability/not. When business owner is talking about refreshing or doing estate planning. They go hand it hand. To do an estate plan w/o a succession plan is creates chaos. Here you go kids; share it. Leaves out employee purchase. If employees purchase, they will need to pay estate and estate divides money up. Need plan to structure buyout so company survives.
- First, you need to surround yourself with a team. You don’t want one of there people doing all the planning. Very common to meet together with the team. Shareholder Agreement; Member Control Agreement. Gives current owner power while alive. Establish funding mechanism. Cash if company can afford; life insurance if not. Company owned, proceeds go to Base line plan for next gen planning = start gifting ownership each year to next generation. Give financial interest; not governance. Maintain control Valuation: Many methods. Fixed Price; formula price (EBIDTA multiple); Appraisal methodology. Need to choose one. Most money in disputes is spent on lawyers and appraisals.
- Revocable Trust Necessary Part of the Plan Avoids Probate – Speeds the Transition of Ownership Will is good but, if doing a plan, why bog down with Probate. Trust is about ¼ the cost of probate. Beneficiary designations can be made in a way that accounts for certain of the next generation not receiving ownership of company. Lifetime Gifting – talked about before. Alternative to discuss is use of an ILIT Avoids estate tax but lose benefits of succession planning