Contractors dedicate considerable time and effort to building their businesses. Given the daily demands of running a successful company, contemplating retirement or succession can seem challenging. However, proactive planning is essential for securing financial stability, minimizing estate taxes, and ensuring business continuity. A well-crafted business succession plan can provide retirement income and a seamless transition of operations or ownership to family members or other entities. Additionally, such a plan is vital for preparing for unforeseen events like death or disability. For instance, if the owner unexpectedly passes away, a succession plan can ensure that the business continues to operate smoothly under the leadership of a designated successor, thereby protecting the financial interests of the family and the employees.
Selecting the Right Succession Strategies
It’s never too early to begin succession planning. Many family-owned construction businesses are passed down to the next generation, with experienced family members taking leadership roles. Other business owners may choose to sell their companies. Regardless of the path you choose, early planning is not just crucial, it’s empowering. According to the Small Business Administration, 70% of family-owned businesses do not survive into the second generation, and only 15% succeed into the third. By starting early, you can develop an appropriate exit strategy and ensure a smooth transfer of ownership. Below are three critical steps to guide you through this process.
- Establishing Your Exit Strategy: For contractors approaching retirement, it is essential to meticulously plan the timing and manner of their departure from the business. If you wish to keep ownership and control within your family, assessing your family members’ interests and qualifications relative to your company’s needs is important. This evaluation will help determine who will assume leadership roles and in what capacities. Additionally, it is crucial to address the issue of fair compensation for family members who may not be directly involved in the business.
- Valuing Your Business: Accurately determining your company’s value is a complex process involving various valuation techniques. Certain methods may be more suitable depending on your unique situation. Reaching a valuation that fairly compensates you as the owner while remaining attractive to potential buyers is a common goal for those planning to sell their businesses. Profit may be a secondary concern for those passing their businesses to their children. From a tax perspective, the Internal Revenue Service (IRS) requires a fair business valuation, especially when the transaction involves related parties. The IRS typically considers factors such as the business’s nature and history, the industry’s economic outlook, how assets and earnings are valued, the presence of intangible assets, and the sale prices of comparable businesses. This means that the valuation process should be thorough and consider all relevant factors to ensure compliance with IRS regulations.
- Transferring Ownership: The ideal transfer strategy depends on your specific financial and tax circumstances, the current structure of your business (e.g., sole proprietorship, partnership, corporation), and the identity of the future owners (e.g., family members, employees, or third parties). Various succession tools and techniques can facilitate a financially rewarding and tax-efficient transition. These may include selling the business outright, gifting business interests over time, establishing a family limited partnership (FLP), creating a trust, or transferring ownership to employees. A buy-sell agreement can be instrumental in ensuring a smooth transition. This type of contract mandates that one party purchases an interest in the company while another party agrees to sell upon a triggering event, such as death, disability, or retirement. Properly funding a buy-sell agreement is crucial to ensure the intended buyer has the necessary financial resources when the time comes. Options for funding buy-sell agreements include employee stock ownership plans (ESOPs) and life insurance.
Preparing for Contingencies
Regardless of your ultimate succession plan, it is prudent to have an updated package of essential information available in the event of an emergency, such as death or disability, before the succession plan is finalized. This package should include:
- A copy of your current business plan
- Updated job descriptions for all positions within the company, detailing responsibilities and delegation of duties
- A list of potential successors
- A comprehensive training plan for your designated successor
- An estate plan to ensure sufficient liquidity for federal and state estate tax obligations.
A thorough succession plan should address various financial, legal, and tax considerations. By investing in proper planning, you can ensure that your business continues to thrive after retirement and in the event of death or disability. This planning provides long-term security for your retirement and safeguards the future of your company and your family. A comprehensive plan will give you the confidence that you have considered all aspects of your business’s future.
Securing the future of your business through thoughtful succession planning is an essential step toward preserving your legacy and ensuring peace of mind. By planning ahead, you can provide financial stability for your retirement, protect your family’s interests, and maintain the continuity of your business. We encourage you to explore how Legacy Private Trust Company can assist you in crafting a tailored succession plan that meets your unique needs and goals. Reach out to us to begin this important journey, safeguarding both your business and your family’s future.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or connect@lptrust.com.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.
