Most owners of family and closely held businesses intend to plan their succession “in a few years.” The difficulty is that a well-run transition, one that preserves the company’s value, treats family members fairly and keeps taxes down, usually takes three to five years to carry out. Owners who wait until a health scare, an unsolicited offer or burnout forces the issue often leave value on the table.
Start with your goals
Before choosing any structure, answer a few personal questions:
- When do you want to step back, and how involved do you want to stay?
- How much income or cash do you need from the business to retire comfortably?
- Is there a family member or key employee who is ready, or could be ready, to lead?
- How will you treat children who work in the business and those who don’t?
The answers shape every decision that follows.
The main exit options
- Transfer to family. Ownership passes to the next generation through gifts, sales or both, often over several years.
- Sale to management. Key employees buy the business, typically financed over time with a seller note and bank debt.
- Employee stock ownership plan (ESOP). A trust buys shares for employees. It can offer tax advantages but adds cost and ongoing requirements.
- Sale to an outside buyer. A strategic buyer or private equity firm usually pays the highest price, but you give up control, and the terms often include an earn-out or a period of continued involvement.
Many plans combine these, such as a partial sale now and a gradual transfer of the rest.
Know what the business is worth
A credible valuation underpins every option. It sets a fair price for a sale to family or management, supports gift and estate tax filings, and shows where value can be added before a transition: cleaner financial statements, less dependence on the owner, documented processes and a diversified customer base. Buyers pay more for a business that runs without its founder.
Plan the taxes early
- Gifts over time can move future growth out of your estate. Minority, non-voting interests may qualify for valuation discounts when supported by a qualified appraisal.
- Trusts, such as grantor retained annuity trusts and intentionally defective grantor trusts, can shift appreciation to the next generation with little or no gift tax.
- New York estate tax has an exemption far below the federal amount and a “cliff”: if a taxable estate exceeds the exemption by more than 5%, the exemption is lost entirely. Certain gifts made within three years of death can also be added back. New York business owners need to plan for both systems.
- Sale structure, including asset versus stock sale, installment payments and how the price is allocated, can change the after-tax result substantially.
Put the agreements in place
A buy-sell agreement among the owners, funded with life insurance where appropriate, sets what happens if an owner dies, becomes disabled, divorces or wants out. Operating or shareholder agreements, wills and powers of attorney should be updated to match the plan and to name who makes decisions if you can’t.
Talk with your family and your team
Many succession plans fail for personal reasons, not technical ones. Tell family members and key employees what you’re planning and why, and give your successors real responsibility before the transition, not after it.
Where to begin
Start with one conversation that brings together your goals, a current view of what the business is worth, and your estate plan. We work alongside owners, their attorneys and their financial advisors to build a plan that can be carried out over time, and we revisit it as the business and family change. Learn more about our consulting and estate planning services.
This article is general information, not tax or legal advice. Tax rules change, and how they apply depends on your facts. Consult your advisor before acting.