Businesses

Business Succession Planning

Arranging to your business to continue after death or Leaving your business to someone – Estate Planning for Businesses

What happens to a business when its owner or partner dies?  In a sole proprietor situation, sometimes the business closes.  Sometimes the business is sold.  Sometimes the owner's family steps in and tries to run the business, whether they know how to or not.  In a partnership, the surviving partner generally continues to run the business.  But what happens to the deceased partner's share?  Does the surviving partner buy that share and give the proceeds to the family?  If so, how is the price determined?  What if the deceased partner's wife, son, daughter or other heir doesn't want to sell and instead wants to participate in the business?  How can this situation be settled to everyone's satisfaction?

The answer is a business succession plan, an "estate plan" for businesses that allows business owners to designate what will happen in advance. 

For sole proprietors, the business succession plan can be designed to allow a trusted, senior employee run the business, while providing continued financial support to the owner's family.  Or a succession plan can allow interested buyers or family members the option to purchase the business at the terms set by the owner in advance.

For partnerships, the basis of the business succession plan sometimes generally a Buy-Sell Agreement, which lays out the terms of sale between the surviving partner and the deceased partner's heirs or estate.  It can also designate what rights the heirs have in the business.  Do the heirs have a right to an independent valuation of the business?  If so, who pays for it?  Part of a business succession plan can be a "key-man" insurance policy.  The death benefit proceeds pay the heirs for their share of the company. 

Another possibility is that the heirs receive income from the business, but cannot participate.  In the case of a corporation, dividends can be paid to the heirs, but the shares passed to heirs can be designated as non-voting shares.  In the case of a limited liability company, the membership interest of a deceased member can be assigned to heirs without voting rights.

Note :  for limited liability companies, succession plans should be included in a well-written operating agreement.

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