This document discusses succession and retirement planning for small businesses. It covers: 1. Key considerations in planning, such as choosing a successor like employees, family, or a third party, and using buy-sell agreements. 2. The transaction/transition process, including representation needed, tax issues, and post-transition roles for the owner. 3. Post-transition planning like continuing the business relationship, retirement savings, and estate planning. The presentation provides an overview of the essential steps and issues to address in succession and retirement planning for small business owners.

1. Succession & Retirement
Planning for Small
Businesses
Jon Fry
Darren Finn

2. Disclosures
This presentation and these materials are for educational purposes only and are not intended, and should not be
relied upon, as accounting or tax advice. Please speak with your advisor about your particular facts and
circumstances.
IRS Circular 230 Disclosure: Any tax advice included in this written or electronic communication, including
attachments and enclosures, was not intended or written to be used, and it may not be used by the taxpayer, for the
purpose of avoiding any tax‐related penalties that may be imposed on the taxpayer by any governmental taxing
authority or agency, or for promoting, marketing or recommending to another party any tax‐related matters.
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3. Agenda
1. Succession and Retirement Planning
Background
2. Key Considerations in Planning
3. The Transaction/Transition
4. Post‐Transition/Transaction‐What Is Next?
5. Questions & Answers
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4. Succession & Retirement Planning Background
1. Why do I need to consider a succession plan?
A. Proactive Planning‐ask yourself the following
i. When do I want to leave or wind down my active role in the business?
ii. How much money will I need to maintain my desired lifestyle?
iii. What is my business worth?
iv. Who will be my successor?
v. Even if retirement is not a desired goal, a plan to protect family and the
business is prudent
B. Reactive Planning
i. What if unforeseen circumstances occur
ii. Receive less than fair value
iii. Employees may be without jobs
2. Why do I need to consider retirement planning?
A. The best planning starts early and builds on goals
i. Assess your needs and lifestyle
B. Take advantage of time and compounding
i. Determine strategy using a mix of tax‐deferred and taxable alternatives
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5. Key Considerations in Planning
Choosing a Successor
Generally three choices:
1. Third Party
A. Receive large cash payment up front
B. Facilitates retirement and estate planning ‐ liquidity
2. Employees and/or Co‐owners
A. They know the business and you are familiar with them
B. More control over the deal structure and timetable
C. Business can use its free cash flow to fund buy‐out
D. Continuity‐maintain the business culture
3. Legacy‐Family Members
A. Personal satisfaction
B. More freedom of choice with involvement in the business
C. Most difficult to achieve
• Family issues (not estate taxes) are the biggest hurdle
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6. Key Considerations in Planning
Sale to Third Party – Maximize Value
1. Need to have in place a business environment that can run well without you
(the owner) with these elements:
A. Strong management structure
B. Plan that develops and retain key employees
C. Focus on value drivers
i. Cash flows
ii. Income
2. Different types of third party
A. Strategic Buyer‐a buyer who is in and knows your industry and can take
advantage of synergies in an acquisition
B. Financial Buyer‐ a buyer who acts more in an investor capacity
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7. Key Considerations in Planning
Buy‐Sell Agreements
1. Essential in any closely held business‐with more than one owner
A. Contractual arrangement between current owners and potentially
future owners
B. Included within a shareholder agreement (corporation) or partnership
agreement
C. Can be a separate document
D. Agreements should be reviewed especially if you haven’t looked at in
the past 5 years
2. Determines disposition of business interests in certain circumstances‐death,
disability, resignation
A. Provides provisions for company and other owners to purchase your
business interest
B. Use to determine a process for valuing the business (formula or
appraisal)
C. Establish transfer restrictions
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8. Key Considerations in Planning
Legacy‐Transfer to Children
1. Continue ownership through children who are managing the business
2. Key issue‐children generally do not have the cash for a buy‐out
i. “Fair price” to the Buyer‐not necessarily “top dollar”
ii. Meet objectives of the Seller
3. Solutions to the cash crunch problem
i. Basic transfer techniques‐gift of stock or sale using minority and
marketability discounts
ii. Installment sales
Special Notes: Business Transfer Techniques
There are multiple means of transferring business interests through sales, trusts, family limited
partnerships. The key issue is determining the value of the business and applying appropriate discounts.
The question valuation experts wrestle with is value to whom? In determining value, experts must be
sure to avoid the pitfalls of Internal Revenue Code section 2703 which is concerned with fair market value
standards. In other words, attempting to transfer a business without regard to any fair market value
considerations can be troublesome when dealing with the IRS.
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9. The Transaction‐Considerations
Checklist of key items
1. Representation you will need
A. Accounting
B. Banking
C. Legal
2. Transaction
A. Selling the business
B. Passing down the business to the next generation
C. Seller owned real estate‐consider long‐term lease arrangement
i. Income stream to retired owner
ii. Ensures business has continuing use of property
D. Charitable bequests/gifts
3. Valuation
A. Value to whom?
4. Basic tax issues
5. Selected key provisions
A. Retaining some control to protect against the business struggling
B. Participating in the upside when value increases‐trailing provision
C. Restrictive covenants
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10. The Transaction‐Basic Tax Issues
Asset Sale to Third Party
1. No problem‐gain (except for depreciation recapture treated as ordinary
income) taxed at long‐term capital gains rates (15%,20%, 23.8%
depending on your tax bracket) IF you are not a C corporation
2. C corporation asset sale is subject to double‐taxation at effective rates
that could be greater than 50%!
3. Buyers generally want to buy assets and Sellers want to sell stock
Legacy Sale (to children/employees)
1.
Key issue‐liquidity and cash must come from the business
A. Generally buy‐out payments will come from after‐tax dollars
B. Also need cash to reinvest back into business
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11. The Transaction‐Basic Tax Issues
Some Alternative Solutions
1. Make whole payments (stock sale)
A. Seller agrees to sell assets and Buyer agrees to a higher sale price
to get a net cash amount into Seller’s hands
2. Structure buy‐out to include deductible consulting or compensation
payments
3. Use non‐qualified deferred compensation (NQDC) payable to owner
A. NQDC reduces business value that must be purchased with after‐
tax dollars
B. More risk to Seller as the payment of NQDC depends on the
continuing profitability of the business during the pay out period
4. Employee Stock Ownership Plan (for corporations)
A. ESOPs are used to provide a market for the shares of a departing
owner of a profitable, closely held company
B. Company sets up plan for the benefit of employees
i. Plan can borrow money to purchase company stock
ii. Company contributions to Plan to pay‐off loan are
deductible
iii. Employee contributions are not taxed until they receive the
stock when they leave or retire
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12. Post‐Transaction/Transition‐What is Next?
1. Continuing relationship
A. Employment
B. Business Adviser/Board of Directors
C. Non‐compete
D. Landlord (retaining real estate)
2. Retirement Planning
A. Save early and save often! Measure your progress
B. Tax advantage savings
A. 401(k)‐deferred
B. IRA‐deferred
C. Roth IRA‐tax‐free distribution
C. Other savings
A. Social Security
B. Your business
C. Your home Installment sale defined‐section 453
3. Estate Planning
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13. Final Take Aways
Determine your
objectives, lifestyle needs
To whom will the business
be transferred
Decide on an exit date and
strategy for winding
down‐even if tentative
Understand value of
business (high level) for
sale and tax purposes
Continue to focus on value
drivers
Retain and motivate key
employees
Building income
Discuss preliminary plans
with advisors
Tax‐review tax issues and
fixes
Legal‐are documents in
order (including buy‐sell
agreement)?
Ensure your plan and
goals are in synch with
your lifestyle and estate
plans
Develop a plan with
measurable goals
Planning early and proactively is best
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14. Succession and Retirement Planning
Questions and Answers
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15. About the Speakers
Jonathan Fry is a partner in our Management & Advisory Services practice at Simon Lever. He
brings over 10 years of experience to our clients and our community including 6 years at an
international accounting firm. Jonathan serves clients in the following areas:
• Succession Planning
• Valuation – Business, Estate, and Gift
• Mergers and Acquisitions
• Personal Financial Planning
Contact Jon at jfry@simonlever.com or phone 717‐569‐7081
Jonathan Fry
Darren Finn is a principal in our Tax Services practice at Simon Lever. He brings over
20 years of tax experience to our clients and community including eight years at an
international taxation firm. Darren serves clients in the following areas:
• Tax Compliance and Planning
• State and Local Tax
• Audit Controversy and Defense
• Succession Planning
Contact Darren at dfinn@simonlever.com or phone 717‐569‐7081
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