Succession Solutions

The following business succession strategies could serve as viable options for your succession plan. To determine the best strategy for your situation, consult a financial advisor and attorney.

Buy-sell agreements
This is a contract between two or more business owners that outlines the terms of ownership transfers in the event that an owner retires, divorces, becomes disabled, dies or experiences other changes in circumstances.

  • Stock redemption - This is a type of buy-sell agreement that occurs when the corporation buys back stock from the shareholder or a deceased shareholder's estate. Typically, the estate receives cash in exchange for the stock.

  • Cross purchase - This type of buy-sell agreement calls for the remaining shareholder(s) to buy the stock of the departing or deceased shareholder. To fund such a plan, stockholders typically buy life and disability insurance policies on each other. The surviving shareholder(s) (not the corporation) purchases stock from the decedent's estate.

  • Wait and see - This is a hybrid agreement designed to give the individuals the flexibility to determine the best possible buy-sell plan at the exact moment needed - at the death of the business owner.

Gifts of corporate stock
This is a lifetime gift, either outright or through a trust, and is often the most effective way to reduce estate taxation.

Life & disability insurance
The advantage of life and disability insurance is that premiums are priced relative to policy proceeds. The insurance is typically used to fund buy-sell agreements.

Private annuities
This may be effectively used for family situations where a parent wishes to transfer an asset such as a business interest to the next generation free of estate taxes while receiving an income for life.

Self-canceling installment notes (SCIN)
This is an installment debt obligation that by its terms is extinguished at the death of the seller. It is similar to a private annuity in that an asset is sold on an installment basis (however with a SCIN the installments are usually shorter than the seller's life expectancy.).

Family partnerships
This is used to shift both the income tax burden and the appreciation of assets from parents to children or other family members.

Management control
A business owner may wish to transfer the equity in a company to family members by gift, bequest or sale, yet the owner may remain uncomfortable with the business insight of the new shareholder. A number of management techniques are available to deal with such concerns:

  • Voting agreements - This is one of the easiest and least expensive options in accomplishing management control. The contract specifically identifies the scope and duration of the agreement and can control the shareholder's vote by creating a voting block.

  • Proxies - This is another management control tool. A written authorization is given by a shareholder to another person to vote on shareholder matters.

  • Voting trusts - Parties to the voting trust agreement surrender their stock to trustees who represent the parties to the trust and vote the stock.

  • Public offerings - When you have no family members to carry on a successful privately held business, you can "go public." This option poses numerous benefits as well as drawbacks. A financial advisor can help you determine if a public offering is your best solution.

  • Employee Stock Ownership Plan (ESOP) - This is also used when succession by a family member is not an option. An Employee Stock Ownership Plan is a way to transfer the business to employees with significant tax advantages.