Business Succession Planning

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Business Succession Planning, by Gary Edkins, Financial Planner, CA Insurance License #: 0624963

When a business owner dies, for restaurants or any other industry, the enterprise or surviving owners will likely have a new business partner…the decedent’s widow or next of kin, a probate judge, executor, or corporate trustee.

If the form of business is a C Corporation, income paid to non-employed heirs will be treated as a dividend – not deductible to the corporation, but taxable to the recipient, creating “double taxation.”

For surviving partners, heirs, or key employees who wish to continue the business, purchasing the decedent’s share of the business places a financial burden on the operating capital and credit available to the business, or for merely attempting to conduct “business as usual.” Potentially, they are also taking on the responsibility and personal liability for the welfare and best interest of the heirs.

The assets of the decedent’s heirs are subject to business risk. All may be lost if the business fails with successors attempting to run the business without the leadership and skills of a deceased principal owner. Heirs may also be subject to the liabilities and debts of the business such as long term leases for the location and equipment.

In addition, it is not unusual for the IRS to use an inflated business valuation, relative to what a willing buyer would pay, to levy taxes against the decedent’s estate, which bears the burden of proof.

Under these circumstances, heirs may be pressured to sell the business at discounted prices, or to liquidate the business and sell off assets at a fraction of their value, when a principal owner dies.

This picture highlights the importance of Business Succession Planning, aka Business Continuation. Some tools of the trade:

A Buy/Sell Agreement is an instrument that is binding on both parties, heirs and surviving owners or intended successors to transact the sale of the business at a fair and predetermined price. This document should be drafted by an attorney who specializes in business or estate planning.

Proceeds received from the sale of the business are generally received income tax free. The business value upon the owner’s death will receive a “step up in cost basis” on the owner’s portion.

Buy/Sell Insurance – If the agreement is funded with life insurance, the event that triggers the sale will also create the cash to purchase the decedent’s business interest with the leverage, or what is in effect “discounted dollars” created by life insurance. It can also serve as an inheritance tool in a family business for heirs that are not involved in the business.

Generally the agreement relieves non-employed heirs of the liabilities, debt, long term leases, potential lawsuits, and business risk associated with attempting to run an unfamiliar business.

Buy/Sell business valuations are generally acceptable to the IRS if: valuations are not based on an unrealistic sales price, the valuation is reasonable, and an acceptable valuation method or formula is used. A certified valuation expert can be consulted who is familiar with the restaurant industry or other industry involved.

This combination of planning tools, commonly known as a “Funded” Buy/Sell Agreement, in addition to having a suitable and competent successor who has proven experience and training in operating the business, will create a smooth transition, and generally guarantee widows or other heirs a fair and reasonable price for the business as a “going concern,” not a liquidation price, and most importantly, the immediate cash to fund the buyout!

Provided courtesy of Prudential Financial Planning Services.   For more information, contact Gary Edkins Financial Planner, CLU®, LUTCF at gary.edkins@prudential.com and 949-633-3365.

Life insurance is issued by The Prudential Insurance Company of America, Newark, NJ and its affiliates. Gary Edkins offers financial planning and investment advisory services through Pruco Securities, LLC (Pruco), doing business as Prudential Financial Planning Services (PFPS), pursuant to separate client agreement. Offering insurance and securities products and services as a registered representative of Pruco, and an agent of issuing insurance companies. 1-800-201-6690.

Prudential Financial, its affiliates, and its financial professionals do not render tax or legal advice. Please consult your tax and legal advisors for advice concerning your particular circumstances.

Important note: If payment is exchanged for the publication, production, or distribution of an article, first sentence should be substituted with: This advertisement provided courtesy of Prudential Financial Planning Services.

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