Opinion: The lost art of business succession planning

Craig Wright

Family businesses account for 54% of private-sector gross domestic product, yet 43% of family businesses have no formal succession plan, according to FamilyBusiness.org.

While those numbers may shock you, it is not surprising that many small-business owners are consumed by the various responsibilities of running their business. Nevertheless, owners ignore succession preparations at their peril and possibly at the peril of their heirs.

There are a number of reasons for business owners to consider a business succession structure sooner rather than later. Let’s look at two of them.

Taxes
Upon the owner’s death, estate taxes may be due, and a proactive strategy may help to better manage them. Failure to properly prepare can also lead to a loss of control over the final disposition of the company.

The ratification of the 16th Amendment in 1913 led to the federal income tax. The actual form and directions fit on a mere four pages in 1913, and they’ve grown to 106 pages today. Actor and comedian Will Rogers once said, “The difference between death and taxes is death doesn’t get worse every time Congress meets.” There have been at least 28 significant changes to the federal income tax since 1913. The reason to focus on taxes now is the current tax code is set to sunset at the end of 2025. The average top tax rate since 1913 is 57.68%, while the current top tax rate is 37%.

The current tax rate on C-corporations is a flat 21%, and it would take an entire article to detail the history of the corporate income tax in the United States, so I’ll let you research that on your own. You’ll likely conclude the current corporate tax rate is one of the lowest for moderate to high levels of corporate income.

The U.S. federal debt has now surpassed $33 trillion, according to tracking by the Treasury Department, and it continues to grow at an astounding rate since the suspension of the debt ceiling this summer. If you ever want to have a sobering look at the fiscal state of our country, spend a little time on USDebtClock.org and notice how quickly the federal debt is increasing. You’ll also see the fourth-largest budget item is net interest on debt. Many reasonable economists suggest raising taxes to stem the fiscal problems in front of us.

Small-business owners looking for exit strategies need to focus on the after-tax value of the business. Many business owners may be looking for an opportunity to sell now to potentially minimize the total taxes they pay upon the sale of the business.

Business value
The absence of a succession structure may result in a decline in value of the business in the event of the owner’s death or unexpected disability. A sudden need to liquidate the business can result in a fire sale and the heirs failing to get full value for the hard work the owner put in to making their business dreams come true.

There are three key steps to a business succession strategy.

1. Identify your goals. When you know your objectives, it becomes easier to develop a plan to pursue them. For instance, do you want future income from the business for you and your family? What level of involvement do you want in the business? Do you want to create a legacy for your family or a charity? What are the values that you want to ensure as they relate to your employees or community?
2. Determine steps to pursue your objectives. There are several tools to help you follow the goals you’ve identified. They may include buy/sell agreements, gifting shares, establishing a variety of trusts or even creating an employee stock ownership plan.
3. Implement the strategy. The execution step converts ideas into action. Once it’s implemented, you should revisit the strategy regularly to make sure it remains relevant in the face of changing circumstances, such as divorce, changes in business profitability, death or disability of a stakeholder, revised tax codes, etc.

A fundamental prerequisite to business succession is valuing your business.

As you might imagine, business succession is a complicated exercise that involves a complex set of tax rules and regulations. You should consider working with legal, tax and financial professionals who are familiar with the process.

Craig Wright is a financial adviser at Strategic Financial in Springfield. He can be reached at cwright@thestrategicfinancial.com.