Succession planning for your business: Tips for an effective transition

Business owners

For some business owners, after devoting their life to their company, envisioning a future without it may be difficult.


Turning over your business to new owners can be every bit as emotional as sending your kids to college or watching them get married. You’re simultaneously proud of your accomplishment and mournful as you transition to a new life phase.

For some business owners, after devoting their life to their company, envisioning a future without it may be difficult.

“One married couple I worked with chose to hand their business over to their children, but one of the kids said, ‘Mom and Dad won’t be able to walk away,'” says Robert Stern, a wealth planning consultant with RBC Wealth Management–U.S. “That helped move the conversation forward with everyone talking through the issue and the parents telling the kids about their life plans.”

Whether you will gift your business to your kids or sell it to an employee or a third party, the important thing is to have a succession plan in place. Ideally, that process should begin the moment a business becomes viable, Stern explains, but that’s rarely been the case when RBC Wealth Management professionals have broached the subject with business owners.

“Realistically, most people begin to think about their business succession plan when they have a health event or a friend or family member dies,” says Dean Deutz, a private wealth strategist with RBC Wealth Management. “In some cases, they reach a business valuation size, such as when their business becomes worth $1 million, or they decide on a milestone target or date, such as wanting to retire in five years.”

While it’s never too early to begin succession planning, Deutz says serious planning should start three to five years ahead of the transition, if possible, and then continue as an ongoing process.

Beginning business succession planning

With any succession plan, a useful starting point is to think about your goals for the business.

“For some clients, the goal is to grow a business they can keep in the family,” says Stern. “Other business owners want to monetize it as much as possible in a future sale. Sometimes people take a hybrid approach where they want to keep it in the family but they also need to monetize it for retirement income.”

Periodic re-evaluation of those goals will likely be needed, especially if you start your succession planning early. Sometimes family members decide to start their own (i.e., a separate) business or they have other interests, in which case you may need to look elsewhere for your succession plan. That might be a current company executive, or perhaps a third party, such as a competitor hoping to grow market share or a private equity firm or family office looking to add to their investment portfolio, says Stern.

In some cases, he adds, family members may be too young or not yet equipped to take on the responsibility of owning the business, and so a transition plan may need to be put in place until they’re ready.

After establishing your goals, you can then evaluate your business to better understand what it might be worth on the market.

“You need to know where you are now and what you have,” says Deutz. “Are you an LLC, a C-Corp. or an S-Corp.? What is your business worth? You can look at tax returns and profit and loss statements, but it’s smart to get a valuation done so you have a real number to work with. Your advisor can help you get started with an informal evaluation.”

You should have a professional valuation done periodically, such as every three, five or 10 years, so you know what your business is worth instead of just guessing, says Deutz.

Business owners and their planning team

As you get more intentional about your succession planning, you’ll need to put together a team of professional advisors.

“Bringing in a team of professionals to help with succession planning and a business transition frees the owners to work on what they do best, which is running the business,” says Stern.

A business estate planning attorney can help you evaluate your options, says Deutz, and a CPA can advise you on the tax implications of those options.

“You’ll also need valuation professionals and a financial advisor who understands where you are now and can help you make investment and estate planning decisions,” Deutz adds.

An insurance professional may be needed as well, particularly if you plan to gift the business to one child and want to provide additional financial security to another child.

Succession planning and paperwork

Your options for a business transition depend on your family members and employees. You can gift, sell or bequest the business to your family members—or choose a combination of the three. Written agreements are essential regardless of your choice, explains Stern.

“You need a buy-sell agreement ahead of time if you plan to sell part or all of the business, even if it’s to a family member,” he says.

No matter which option you choose, it’s best to integrate your business succession plan with your personal estate plan, Stern explains, to take into account issues such as how you can fairly divide your estate among family members inside and outside the business. Additionally, your plans for your estate, such as philanthropic donations or specific bequests, may influence your business exit planning.

Other possible succession options include selling to a co-owner, a third party, an employee or an employee stock ownership plan (ESOP).

Communication is essential in deciding which route you want to take, Deutz says.

“You need to talk to the stakeholders to find out if your family members want the business or if an employee you plan to sell it to wants it,” he says. “If you do plan to sell to a co-owner, an employee or a third party, you need to find out if they’re willing and want to buy or be an owner of the business.”

If you’re selling to someone in your business, you’ll need to have a written agreement and plan in advance, says Stern. If you’re selling to a third party, paperwork won’t be generated until you begin negotiations for the sale.

Accelerated succession planning options

While most succession planning will ideally look several years into the future, it may also be necessary to prepare for an emergency business transition if you become disabled or suddenly pass away.

“It’s helpful if there’s someone other than you who can operate your business if you have to step away,” says Stern.

If you’re the only one who can run your business, such as if you’re a physician or lawyer without partners, that can be more difficult to sell than a business with a structure and processes in place that someone else can step in to use if necessary.

Without a succession plan, your will and revocable trust will dictate what happens to your business, says Deutz. A revocable trust allows the asset to avoid probate, but a will does not.

“The less time you have to plan, the more likely you are to get less value for your business,” says Deutz. “A discounted sale can be terrible for the surviving family, who may also have estate taxes to pay within nine months of the death of the owner. For example, a $50 million business might incur $20 million in estate taxes, but if the surviving family has to sell fast for $25 million, they’ll only net $5 million.”

While it may not be possible to plan for every contingency, a will, a revocable trust and a succession plan can protect your heirs. Your team of advisors can provide support now and assist your family as your business and life plans evolve.

RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in consultation with your independent tax or legal advisor.

RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.

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