Business Succession Plan – what to do?
The death of a principal owner of a closely held business can create serious financial problems for the estate, the business, and the survivors of the decedent. Often, the decedent’s interest in the business is a major portion of his or her total estate. Upon his or her death, the survivors may be faced with significant problems concerning the continuation of the business and its orderly transfer, such as:
- The estate tax generated by the closely held business can place a substantial burden on the estate, which may necessitate a forced liquidation.
- If the corporate stock is sold to an outsider, the surviving owners’ interests may be jeopardized and their control diluted.
- The decedent’s heirs can be left in a disadvantaged position to negotiate a fair purchase price for their shares.
- Should the heirs desire to remain in the business, they may not be able to take part in management—which would limit their ability to determine business policy or compensation to business owners.
Buy-Sell Agreements Can Provide an Orderly Transition
Most business continuation problems can be avoided with planning that includes a buy-sell agreement. These agreements provide for the orderly transfer of the decedent’s business interest to key employees, business partners, co-shareholders, loved ones, or the company itself at a fair value, determined in advance of the business owner’s death.
Under the terms of a buy-sell agreement, the parties agree in advance to purchase the interest of an owner upon his or her death or, in some cases, disability. Generally this means that either the remaining partners, key employees, family members, or the company agree to buy out the shares of the deceased’s successors, and the successors agree to sell. Prices and terms of the buyout are established prior to the event and apply to all parties subject to the terms of the agreement.