Financial: The dos and don’ts of succession planning

Home Column Financial: The dos and don’ts of succession planning

January 20/27, 2020: Volume 35, Issue 15

By Roman Basi

Any family-owned or small business will reach a day where ownership must change hands. As a business owner, maybe you’ve been preparing one of your children to take over. Or perhaps you’ve trained and equipped a key employee to take the reins. Whoever it is, and whenever this time comes, it’s imperative to have a plan in place that allows you to recoup the value of your business while minimizing your tax burden and maintaining a viable path forward for the business.

Business succession can take place in many forms. Whether transitioning the business to a child, selling the business to a key employee or selling to a third party (strategic buyer or equity group), a business succession plan should be a clear, concise, step-by-step plan. A plan that sets forth the intentions of the parties involved, establishes a credible substantiated valuation of the business, develops a strategic method of transfer or sale and ensures practices and strategies that safeguard your legacy.

The intention of the parties will ultimately guide the succession plan. Retaining a succession plan advisor who’s able to encompass and integrate the intentions of the parties from a tax and accounting perspective is vital to extract the value of the business. Note: A business succession plan is not a one-size-fits-all design. It is a strategy that should integrate and utilize every factor of value in your business to accomplish an agreed-upon, long-term viable plan.

Within your succession plan should be a credible business valuation by a qualified appraiser that not only provides a quantitative value but ensures the value being exchanged will stand up to IRS scrutiny—which, if not overcome, could result in the reclassification of the transaction affecting not only the plan itself, but also the selling or transferring business owner’s tax effect on received payments.

From a tax perspective, arguably the single-most important piece of the business succession plan is the Tax Minimization Analysis (TMA). This allows the business owner to understand the tax implication of each factor within the plan. The TMA will allow your advisor to use all aspects of your business to achieve your plan. For example, your stock or asset basis, cash in the company, capital gain vs. ordinary income or liabilities vs. expenses.

Implementing these aspects into the TMA allows the business owner to see the net tax effect (federal and state) of each aspect. It also pro- vides the financial insight necessary to understand what life looks like after the succession plan is implemented, allowing the business owner to gain an understanding on future financial planning.

After your advisor has walked you through the valuation calculation of your business, broken down the step-by-step structure of your business succession plan, and provided the net tax effect of each and every aspect, it’s now time to implement the plan and ensure you’re protected from a legal standpoint.

If a business succession plan is something you’ve been thinking about, or if you have any questions, please contact The Center for Financial, Legal & Tax Planning at 618.997.3436.

 

Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He writes frequently on issues facing business owners. Please visit taxplanning.com for more information on succession planning and other business concerns.

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January 27, 2020

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