The Critical Importance Of Proper Business Succession Planning

By Terrance K. Resnick and Leon B. Resnick, partners in Resnick Succession Group

Terrance K. Resnick

This past February when the Philadelphia Eagles resoundingly defeated the Kansas City Chiefs in Super Bowl LIX, celebration ensued around Eagles Nation. Another season of excitement, challenges, and epic wins culminated once again with the ultimate prize.

What if your ISSA company mirrored Philadelphia’s story; however, there wasn’t a celebratory parade at the end?

Improper business succession planning can be a parade stealer. As a business owner, it’s possible to have a successful company and along the way experience a range of highs, lows, challenges, and struggles and ultimately achieve great success and come out on top — or think this to be true. Business success is twofold — during the business owner’s lifetime and after the business owner’s passing.

During lifetime business owners have the ability to make decisions regarding their enterprise, but after death not so much — unless proper business succession planning has been implemented.

Foundational components of business succession planning include legal documents that assure a smooth ownership transition. Many times, these documents include a buy-sell agreement which should be, but isn’t always, coordinated with a business owner’s personal estate planning documents (typically a will and trust(s)).

Another vital component of succession planning is a valuation that will satisfy the terms of a buyout as well as the IRS in the event of a gift tax audit should the company be transferred during the business owner’s lifetime, or an estate tax audit should the company be transferred after the business owner’s passing.

And last, but certainly not least, is excellent liquidity planning which oftentimes is the missing piece of a business owner’s business succession plan and can ultimately, if not done correctly, absolutely undermine the other planning in place.

Leon B. Resnick

Although it does happen, it is very rare when a business owner literally has nothing in place. It would be uncommon for a business owner not to, at a minimum, have a personal will and standard operating agreement for the company. Attorneys and accountants play a vital role; however, it is critical for a business owner to have more than a basic knowledge of what’s in place. It is imperative that the business owner knows specifically what’s been implemented and be certain that the planning implemented not only meets objectives but also minimizes taxation. Most business owners, regardless of industry, cannot say specifically what they have in place and how it works. This is a very dangerous position to be in.

Knowing what that “something” is, is key. There are various types of legal agreements, valuations, and even life insurance policies that are often utilized to serve as the engine of these plans. Although there may be similarities, the end result and the success of the plan can be, and many times are, vastly different.

It’s also critically important for ISSA business owners to have the correct buy/sell agreements (if the business is owned by more than one party), estate planning documents, and life insurance to coordinate with business succession and estate planning goals. Simply wanting something to happen is insufficient. Intentions are great, but the tax man is stronger.

In addition to controlling your destiny when it comes to sound business succession there are other areas that should be addressed beyond the boilerplate basics. As an example, for ISSA business owners who have key personnel, how would the successors react if those key people were no longer there? Retaining and rewarding those vital to the company’s success strengthens the business for the next generation of ownership. And this often can be accomplished without having to transfer ownership interests to non-family members, something that our firm typically frowns upon with family-owned businesses. Unless it’s a unique circumstance, family-owned businesses should typically remain with the family.

Life insurance, which should be completely tax free (both income and estate) can create excessive taxes if design and ownership structure is set up incorrectly. Furthermore, as part of the Pension Protection Act of 2006, with any entity-owned (corporation, LLC, partnership) insurance on the life of an employee, even the business owner will be 100% income taxable if certain steps are not taken to keep the proceeds tax free. Massive amounts of taxes will be owed that legally, and easily, could have been avoided.

Having an independent assessment of your planning is prudent. One of two results will be realized: either the ISSA business owner will receive confirmation that the planning is where it needs to be or discover inefficiencies that otherwise may never have been discovered until it was too late to correct.

Legacy and reputation should be important to all of us. Controlling that “controllable” is in your grasp. You can dictate whether you’ll be remembered as the ISSA business owner who left a legacy of success and goodwill behind or the ISSA business owner who ultimately wiped out.

Terrance K. Resnick and Leon B. Resnick are partners in Resnick Succession Group, a nationally recognized business succession, estate planning and life insurance advisory and implementation firm with offices in Philadelphia and Kansas City. Terry and Lee work with business owners throughout the United States. Contact Terry at terry.resnick@resnicksg.com or 215-921-6789; Contact Lee at lee.resnick@resnicksg.com or 913-681-5454.