Three Essential Steps to Business Succession Planning: Step 3


There are three essential steps to developing a business succession plan.

  1. Define your long-term personal and business goals.
  2. Develop a management plan for the business.
  3. Design an estate plan to transition ownership of the business.

In this article, we look closely at the third step.

Design an estate plan to transition ownership of the business

A major concern for business owners with children active in the business is treating all children equally in the succession process. The situation is further complicated when business owners lack sufficient non-business assets to allow for an equal share of their estate to any children not active in the business. Developing the appropriate estate plan is crucial in addressing these concerns.

Divide Your Estate

Selling (as opposed to gifting) the business to the active children may be one option allowing equal distribution among all children. The sale price may be at fair market value, determined by an independent appraisal. Typically, the purchase price will be paid in installments with interest over a term of years.

Gifting the business to the active child and leaving non-business assets to the other children is also an option. Essentially, the other children would receive an equalizing distribution of other assets in order to provide a “fair and equitable distribution” for all. If non-business assets are insufficient to provide said fair and equitable distribution, you may consider making up the difference by purchasing and holding life insurance in an irrevocable trust for the benefit of the nonactive children.

If the active child has played a key role in the success of the business, you may feel it is fair to acknowledge their time and dedication. This can be done through lifetime gifts of business interests (as opposed to selling the business), through a larger-than-equal portion of your estate in the form of the business interests, or through a locked-in valuation for that active child (ensuring them the benefit of the future growth driven by their efforts). Keep in mind that in some cases, fair may not always be equal.

Instead of distributing business interests outright to your active child, you may consider keeping such interests in trust. Establishing a dynasty trust will keep business interests in the bloodline for your child, your grandchildren, and successive generations. A dynasty trust will also protect your successors from outside influences, including creditors, divorcing spouses, or premature death of your child.

Consider Taxation Factors

An essential part of designing an estate plan for business succession purposes is to minimize gift and estate taxes. Factors to consider in determining what estate planning techniques to use may include:

  • The size of your taxable estate
  • Your need for retirement income
  • Your desire to control the business during the succession period
  • Your desire to treat your children (both active and inactive in the business) fairly and equitably

Plan for the Future

In combination with your estate plan, the succeeding owner of your business should enter into a buy-sell or shareholder agreement, a legal arrangement providing for the redistribution of shares of the business following a triggering event (i.e., an owner’s death, disability, retirement, legal proceeding or termination of employment), with the other owners. The buy-sell agreement sets forth the purchase price and payment terms upon the triggering event. Life insurance is one way to provide the cash necessary for the business or surviving owners to purchase a departing owner’s interest.

Business succession planning is a complex process, but a sound business succession plan is an investment that can pay off for generations to come. An estate plan that aligns with the goals of your business plan and is tailored to meet your personal, business, and financial situation and objectives is a vital component of the process.

Forming a team of advisors to assist in the planning process is essential. Each professional brings to the table a distinct skill set that is necessary to design and implement a plan for you and your family.

Planning for the future is difficult and filled with unknowns. With the right team and the right plan, you can find power in planning for that which you can control.

What is business succession planning?

If you have been actively involved throughout your career in building your business and overseeing its continued success, thinking about retirement can call for answers to difficult questions.

Your situation may involve a child who is part of the business. You may have certain employees who wish to take over. Perhaps you have neither, and your questions begin with finding a buyer. Your concern may lie primarily in providing for your spouse in the event of your death or disability.

These are all common scenarios faced by business owners. How do you leverage your years of hard work you have invested in building a successful business to ensure it continues to flourish through a transfer of leadership to the next generation?

A successful transfer requires intricate planning. Failure to properly plan for a smooth succession during your lifetime can result in monetary losses, increased taxes, damage to family relationships, and even loss of the business.

Estate planning is an essential component of the succession planning process. The goal of estate planning is to ensure that your loved ones are cared for after you are gone. Estate planning provides for the management and transfer of your assets, including your business, in the event of your death or incapacity, at the lowest financial and emotional cost for your family.

Business succession planning integrates estate planning techniques in order to position the business for continued success throughout and following its transfer.

Need to review? Read more in our business succession series:

Pittsburgh Business Succession Planning Attorney

Dan Lynch, Founder and Managing Partner of The Lynch Law Group, routinely helps business owners with their business transitions. For questions about this process, Dan can be reached at or via phone at (724) 776-8000.

This entry was posted in Business Succession Planning, Corporate, Legal Watch. Bookmark the permalink.