Those who own successful businesses must protect and preserve them with appropriate business succession planning so that their legacy can withstand the disability or death of an owner/operator. The successful transition of a closely held business from one generation to the next takes careful planning. A proper business succession plan involves the coordination of business, estate, tax, and financial planning considerations. The goal is to ensure the survival of the business, finding a mechanism to either pay for the transfer of ownership of the business or a way to gift to the successor, while minimizing the taxes that will have to be paid as a result of the transaction.
  If you are a business owner and considering succession planning, the following questions are a good starting point to planning your succession plan:
  Who gets the torch? Not all closely held business can be run successfully as a family business. You are the expert for your own family and you need to remember that sometimes fair does not mean everyone in the family gets a piece of the family business. Often consideration must be given to how to pass the business to the family members best able to carry the torch, while making considerations for other family members. In other instances, a longtime employee can be “like a son” to the owner and, in such an instance, may be better suited to ensure the survival of the business while at the same time making sure the owner’s family receives fair value from the business.
  How much is your business worth? A proper valuation of your business is crucial to a proper plan. In the context of a sale or merger during your lifetime, knowing the value of your business is key to making sure you make a fair and reasonable deal. In the context of the death of an owner, valuation is even more important. The valuation of the business is used to determine the date of death value upon which estate tax is based. However, the Internal Revenue Service will review your business records to check your valuation. Undervaluation can result in the imposition of additional estate taxes along with interest and penalties.
  Does Your Succession Plan Involve A Gift Or A Sale? Some businesses can sustain multiple generations and the first generation can afford to give successor generations an equity interest in the business without regard to remuneration or the loss of revenue as an owner. Other business owners cannot afford to give away equity or the owners are not inclined to make a gift. In such instances, carefully planning is required for a secure and structured buy-out.
  Should You Insure Your Plan? Life insurance is often a key component to any business succession plan. An insurance premium is usually more affordable then a lump sum buy-out or an on-going payment obligation. Consider how insurance can help your business succession plan, whether an inter-family sale or as further security in the context of a third party sale.
  How is ownership allocated? Think about how the business is owned. Is ownership shared with a spouse or other family members? For tax purposes, it may make sense to transition some of that ownership before death. Also, how are the real estate and other assets of the business owned. Often times, the founder of the business will personally own the real estate from where the business operates. Linking the business to the real estate with a long term lease will help further ensure the financial security of the seller. Likewise, you should consider whether or not all of your essential contracts and licenses are transferable to best protect the operations of the business.
  Who holds the power? Because owners of closely held businesses are so busy ensuring the success of the venture, the ministerial operations of the business are often overlooked. To best protect the business from the unanticipated absence of an owner/operator due to death or disability, a spouse or other appropriate family member or trusted advisor should hold an officer position in the entity, have a working knowledge of the business operations and finances and be familiar enough with the operations to keep the business on course to maximize value.
  This article is by no means an exhaustive discussion of the relevant issues to business succession planning. But if you own a business and want to ensure its continued success or make sure your family is provided for, in the event of your death or disability, your first step should be to discuss the idea with your professional team, including your attorney, accountant, and insurance agent to identify the key issues of your unique situation. In the words of marketing management thinker and author Philip Kotler, “Companies worry too much about the cost of doing something. They should worry about the cost of not doing it.”
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  This article was prepared by Yasmeen S. Khaleel, Esq., a Shareholder in Capehart Scatchard's Business and Trust & Estate Group. Ms. Khaleel concentrates her practice in the areas of estate and trust planning and administration, business succession planning, and tax planning.  She has also handled estate and trust litigation, and guardianship actions. Additional areas of Ms. Khaleel’s practice include business succession planning including entity formation and transactional matters. Should you have any questions or would like more information, please contact Ms. Khaleel at 856.914.2094 or by e mail at ykhaleel@capehart.com. 
  This article is designed to provide general information on the topic presented and is provided with the understanding that the author is not rendering any legal or professional services or advice. This article is not a substitute for such legal or advice. If such services are required, you should retain competent legal counsel.