In this article, you can discover…
- How to choose the right successor for your business.
- Ways to minimize tax liabilities in Virginia.
- The best ways to plan for and structure a buyout agreement.
How Do I Choose The Right Successor For My Business?
Choosing the right successor for your business depends largely on the nature of your business and its structure. Here’s how we approach this decision:
Sole Proprietorships Or Consulting Businesses
If your business revolves solely around you think of something like a consulting practice its value may primarily consist of physical assets like a car or office equipment and bank accounts. In this case, the successor role is less about running the business and more about overseeing a liquidation event since your executor or trustee would liquidate the assets and distribute the proceeds to your beneficiaries.
Businesses With Employees Or Ongoing Operations
If your business has a team of employees or an infrastructure that can operate without you, a successor becomes more critical. Here, you might identify an employee or partner who understands the business and has the skills to take it forward and promote from within. Yet, sometimes, the best option is to have someone purchase the business from your estate or family and continue its operations.
Determining the best choice in your circumstances depends on factors like the complexity of your business, its talent pool, and potential outside buyers or managers. Discussing options with a trusted advisor can help identify the right path based on your unique circumstances.
How Can I Minimize Tax Liabilities In Business Succession In Virginia?
Minimizing tax liabilities in business succession generally depends on two primary considerations: capital gains taxes and estate taxes.
Estate Taxes
Currently, the federal estate tax exclusion is $13.6 million. Most estates fall below the threshold for federal estate tax liability. In Virginia, there is no state level estate or inheritance tax, so estate taxes are often not a major concern for most business owners in the state.
Capital Gains Taxes
When a business is passed to heirs, the step up in basis rule applies. This means the business’s tax basis is adjusted to its fair market value at the time of transfer, significantly reducing capital gains taxes if the business is later sold. As a result, there may be little to no immediate tax liability for heirs upon succession.
Can I Use A Buy Sell Agreement To Support Succession?
Buy sell agreements are critical tools for supporting business succession. Every time we assist clients in structuring their businesses, we drive home the importance of having one in place. Many wonder why it’s necessary, and the answer is this: it provides a clear plan for what happens to the business in the event of an owner’s death, disability, or departure.
Without a buy sell agreement, your family could end up dealing with your business partner someone you may have vented about at home (and not in a favorable way) and they may not be equipped or willing to manage that relationship. A buy sell agreement removes this uncertainty by outlining specific actions, such as:
- Buyout terms and, by extension, deciding if the surviving partner will buy the deceased owner’s share from the family.
- Dissolution triggers such as a death or departure that could dissolve the business.
- Financing plans that outline how the buyout will be funded whether through life insurance, installment payments, or other arrangements.
With nearly two decades of experience in estate and business succession planning, Sam Mansoor of Legacy Law Centers has guided Virginia business owners in securing their legacies. His in depth knowledge of structuring buy sell agreements, minimizing tax liabilities, and selecting the right successors ensures seamless transitions. Sam’s acumen will help you avoid common pitfalls and craft customized strategies tailored to your unique needs.
Ready to safeguard your business’s future? Contact Legacy Law Centers today to start planning for long term success.
What Is The Best Way To Structure A Buyout Agreement?
The best way to structure a buyout agreement starts with an open discussion. In it, you should identify key details such as the triggering events that would initiate a buyout, be it death, disability, retirement, or voluntary departure, and who the partners or stakeholders are.
One key element is to establish a clear valuation formula upfront. This eliminates confusion and avoids disputes about the business’s worth later. By agreeing on a valuation method at the outset, you prevent situations where multiple appraisals create unnecessary complications. A solid buyout agreement should also address:
- Funding the buyout, including ways ranging from life insurance policies, payment installments, or other financial arrangements.
- Transition plans, namely how the ownership and operational responsibilities will shift during and after the buyout.
- Roles and protections, clarifying any ongoing roles for the outgoing owner and protecting the remaining owners from undue disruption.
Why Is It Important To Update Succession Plans With Business Growths/Milestones?
As your business grows or reaches significant milestones, it’s vital to revisit and update your succession plan. The initial plan was likely designed based on the business’s value and structure at the time. However, growth can lead to significant changes in both the valuation and equity distribution, which must be reflected in the plan.
For example, if the original formula was based on multiple assets, like three times their value, but now the business has gained substantial goodwill or blue sky, its value may be far greater than anticipated. This disparity could lead to an outdated or inequitable succession strategy if not adjusted.
Similarly, changes in equity such as bringing in new partners or changes in ownership shares can affect how the business should transition. By aligning your succession plan with current circumstances, you ensure it accurately represents the business’s value and ownership dynamics, avoiding potential disputes or complications down the line.
How Do You Guide Business Owners Who Are Unsure About Choosing The Right Successor Or Leadership Team For Their Business?
Choosing the right successor or leadership team is a deeply personal decision. We’ll help you navigate this by assessing the strengths and weaknesses of each candidate you propose. We look at not just their qualifications but also their ability to uphold your business’s values and drive future growth.
For some businesses, the solution may involve supplementing a successor’s skills with additional support, like hiring key advisors or managers to ensure a smooth transition. In other cases, outright selling the business may be the best path if no suitable internal candidate exists or if you feel the business would thrive better under new ownership.
What Are The Most Common Issues That Arise When There’s No Clear Business Succession Plan In Place? How Do You Help Clients Address Them?
When there’s no clear business succession plan, one of the most frequent issues is that ownership may pass unexpectedly to a spouse or other family member who may not have the skills, interest, or experience to manage your business. This often leads to conflict, especially if they become co owners with the existing business partner and have differing views on how to move forward. This lack of alignment can stall operations, disrupt decision making, and even risk the business’s survival.
To address these challenges, we’ll work diligently with you throughout the process of creating a comprehensive succession plan. We outline what happens to ownership and control in the event of death, retirement, or incapacity. This can include buy sell agreements, structured buyouts, or other mechanisms to ensure a smooth transition and avoid potential disputes.
Still Have Questions? Ready To Get Started?
For more information on Business Succession Tips For Entrepreneurs In Virginia, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (571) 260-0827 today.
With nearly two decades of experience in estate and business succession planning, Sam Mansoor of Legacy Law Centers has guided Virginia business owners in securing their legacies. His in depth knowledge of structuring buy sell agreements, minimizing tax liabilities, and selecting the right successors ensures seamless transitions. Sam’s acumen will help you avoid common pitfalls and craft customized strategies tailored to your unique needs.
Ready to safeguard your business’s future? Contact Legacy Law Centers today to start planning for long term success.
