Business succession planning is the process of choosing the people that will manage your business after you leave while ensuring that they are well-equipped, prepared, and motivated to continue your organization’s successful legacy. It often overlaps with estate planning, which differs in that it pertains to strategies for managing both business and personal assets owned by a person during their life, in periods of incapacity, and following their death.
At Schneider, Garrastegui & Fedele PLLC, we are business succession planning lawyers with extensive experience in developing plans for business owners who seek to strategically transfer ownership and control of their businesses when they leave the leadership positions in their companies.
In this article, our succession planning attorneys answer frequently asked questions regarding succession planning in Long Island and New York State.
Is Business Succession Planning Necessary or Worth The Effort?
While it takes significant effort early on, business succession planning can save your company from eventual ruin. The future of your business hangs in the balance, and creating a business succession plan is your opportunity to guide your successor(s) and protect your legacy. Neglecting to take this opportunity means relinquishing your control.
You can prevent an unexpected issue from forcing your hand. Devoting time and energy to a carefully-designed business succession plan is worth it if you believe your business deserves to remain successful in your absence.
When Should I Start Creating a Business Succession Plan?
Ideally, you will begin working with a New York business succession planning lawyer at least five years before your intended retirement date. Starting earlier can result in more time to train and prepare your successor. We can work with you at an accelerated pace if you have less than a five-year window, but you should not delay getting started.
What Problems Can I Seek to Avoid Through Business Succession Planning?
You need to understand your intentions for your business can be dashed by a sudden event if you do not have a succession plan in place. Some major organizational threats that an effective strategic business succession plan can avoid include:
- An unprepared, uninterested, or unequipped successor
- A buyer who does not retain customer loyalty
- A successor unappreciative of impact on the customer base and community
- Breaks in effective business operations during and after the transition
- Loss of vision for the company or hijacking of company objectives
These threats can be mitigated by the development of a plan that not only recognizes the legacy and objectives you have set for the organization but also identifies leaders and leadership qualities that should be fostered in coordination with a practical process for training and installing those leaders. A plan should account for contingencies and be managed over time to address any new developments in the family or business conditions.
How Will Business Succession Planning Affect Gift, Estate, or Capital Gains Taxes?
The transfer of your business can involve Gift Tax or Estate Tax if it meets certain thresholds. Gift Tax can be applicable if the transfer happens while the owner making the transfer is alive, and the sale is made for less than full fair market value, whereas Estate Tax can apply if the transfer is made after death. Capital Gains Tax is tied to taxable income and can apply if assets are sold for more than their purchase price. There may be benefits to transferring some assets incrementally before death.
Depending on the details of what is included in your business and the nature of the transfer, tax benefit opportunities may be incorporated into your optimized succession plan.
What Will Be Considered During Business Succession Planning?
Several considerations are involved in creating the overall succession plan for your business. Your plan will incorporate:
- Selection of a Successor
- Valuation of Your Assets & Timing of Transfer
- Guidance for Your Company’s Identity and Culture
- Timing of the Anticipated Leadership Transition
Your company’s goals and broader objectives will be considered concerning the skillsets of successor candidates, as will a potential successor’s financial capacity to acquire and maintain your company, if applicable. You will assess your confidence in the successor’s motives and interests concerning the company's future and the interests of employees, customers, and invested community members.
Valuation methods and timelines will vary depending on the nature of your business, its assets, and the type of succession plan you choose. The size of your business will also affect how much you might incorporate training and retention planning into your organization’s succession plan. Milestones will be developed to aid in keeping the leadership transition on track with the future you visualize for your company.
Are There Different Types of Business Succession Plans?
The current condition of your business, any foreseeable issues, and your preferred path will influence the type of business succession plan you will want to prepare. You may plan on keeping the company's ownership within the family, or you may be planning to pass it on to a well-established employee who is capable of managing the business. Alternatively, you may be interested in a possible sale or merger opportunities. Here are some considerations for different types of business succession plans:
- Passing Your Business to an Heir:
- Multiple family members may be interested in leading.
- Power struggles can develop.
- Some heirs may not be invested or interested in the business.
- Selling Your Business to a Co-Owner:
- Surviving spouses need to be compensated fairly.
- Loss of key employees is a common threat.
- There is the risk the surviving co-owner may later choose to sell the business rather than continue the legacy you envision.
- Preparing an Existing Employee to Take Over:
- Your successor will need to be respected and well-liked by other employees.
- A buy-sell agreement will be required.
- An established employee may not have the financial resources to pay for your company upfront.
- It can take several years for the full amount to be paid off using a seller financing approach.
- Selling Your Business to an Outside Party:
- The price you can sell for may be lowered if the organization requires more investment by the buyer through rebranding or establishing a self-sustaining management structure.
- If your company is closely associated with your personal or professional identity, it may be difficult for you to see the buyer deviate from your intended legacy for the business.
- Using Buy-Sell Agreements to Coordinate Ownership Among Co-Owners:
- The future of the business is subject to the wishes of the surviving owner(s).
- Life insurance policies used in cross-purchase agreements vary in relative cost by age differences.
- Having several owners can make cross-purchase agreements impractical.
- Entity purchase plans with several owners require all owners to agree to the plan.
What Do I Need To Ensure I Protect The Future of My Business?
Pursuing a business succession plan is a wise and responsible decision for your company's and your family's future. Our experienced business succession lawyers can help you through each step of developing your plan:
- Choose and Plan Your Exit Strategy: This involves plotting and coordinating the completion of incremental essential tasks relative to your anticipated retirement date.
- Select Your Successor: This entails identifying successor candidates and comparatively analyzing skill sets, knowledge, and experience relative to the leadership role in question, noting any gaps that need to be bridged before the leadership transition can be completed.
- Train Your Successor: The successor you choose will most likely need to be prepared through gradual training in new responsibilities and increased mentoring before the transition, even if this person is a family member or established employee deeply familiar with the business.
- Protect Current Employees: It is crucial to prevent turnover and promote confidence in the new leadership and positive perceptions of your company's future direction by ensuring the employees who have helped you build your business can confidently invest in continuing to contribute well into the future.
- Limit Your Tax Exposure: Depending on your situation, Gift Tax, Estate Tax, or Capital Gains Tax may apply, and such requirements may be strategically limited through a business succession plan that can overlap with your estate planning strategy.
Start Your Business Succession Plan Soon to Protect The Future of Your Company
At Schneider, Garrastegui & Fedele PLLC, we have extensive experience in succession planning. Our knowledgeable business succession planning lawyers will guide you through drafting required documents and other conscientious preparations in advance of the strategic transition of your business. Let us know your additional questions before searching for a “business succession planning attorney near me” in New York. Call us today at (631) 519-9831 or complete our online form to schedule a consultation.
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SCHNEIDER, GARRASTEGUI & FEDELE PLLC
135 Pinelawn Rd #250s
Melville, NY 11747