Succession/Exit Planning

Succession Methods

There are a number of succession methods to implement an orderly transfer of the ownership of the company. Some common succession methods are:

Buy/Sell Agreement

A succession method most appropriate to closely-held companies is the buy-sell agreement. Inc. magazine calls buy-sell agreements "the next best thing to immortality." Buy-sell agreements protect the company against unexpected events such as an owner becoming disabled, dying, desiring to sell to a third party non-owner, retiring, becoming divorced or bankrupt, or terminating his or her employment with the company.

Family Limited Partnership

A succession method commonly used in family companies is a family limited partnership. It is often used by parents and grandparents as a vehicle to transfer ownership during their lifetimes while retaining control and management of the company.

Recapitalization

Because stock in a Subchapter "S" corporation cannot be held in a family limited partnership, the recapitalization of the family business that is in a Subchapter "S" corporation can be used to achieve the same results and benefits of a family limited partnership.

Gifting

Owners of companies can make gifts of ownership interests to the next generation. However, gifting should be done in a careful manner. Before gifting company ownership, control restrictive agreement and many other issues need to be addressed.

Testamentary Transfers

Another possible succession method is via testamentary transfers. However, large testamentary transfers may be subject to federal estate tax. The most common method of testamentary transfers is through the establishment by the company owner of a revocable living trust during the owner's lifetime. One of the primary reasons to establish a revocable living trust is to avoid the expense and delay of probate of the owner's estate, but such a trust can also be utilized for company succession purposes. The terms of the trust can pass the right to ownership of the company to one or more beneficiaries in various ways, some of which are:

• Outright Distribution
• Option to Purchase
• Right of First Refusal