Succession Planning for the Small Business Owner


Volume 6 • Issue 10 • October 2016

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. In this month’s issue, we will look at succession planning for the small business owner. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.

“Small businesses,” that is, those that have less than 500 employees, comprise 99.9% of all businesses in the United States. The owners of these businesses will, someday, exit their businesses due to retirement, disability or death. However, most owners are so busy working that they don’t slow down and think about business succession and estate planning issues. That is one of the primary reasons that less than one-third of family businesses survive to the second generation; 65% of those fail to survive the second generation; and 90% of family businesses fail to survive the founder’s grandchildren. There is an old proverb: “Shirtsleeves to shirtsleeves in three generations.” Or an alternative version: “The father buys, the son builds, the grandchild sells, and his son begs.”


Too often, a business owner is so busy working in the business that he or she has a hard time working on the business. However, in those moments of introspection, some of the questions the business owner might have are:

  1. Can I ever retire?

  2. Who can possibly take over the business?

  3. Can I get retirement income without going out of business?

  4. What happens if I should prematurely die or become disabled?

  5. Is my successor ready?

The Six Steps to a Successful Succession Plan

Step One: Identify Motivation and Goals

In the Lewis Carroll classic, Alice in Wonderland the following dialogue occurs:

Alice: Would you tell me, please, which way I ought to go from here?

The Cheshire Cat: That depends a good deal on where you want to get to.

Alice: I don't much care where.

The Cheshire Cat: Then it doesn't much matter which way you go.

Alice: ...So long as I get somewhere.

The Cheshire Cat: Oh, you're sure to do that, if only you walk long enough.

In order to get where you want to go, you must establish goals.  This will help clarify priorities, avoid quick fixes, identify a desired outcome, and focus your energy on the most urgent concerns.

Typical goals might include:

  • Create and preserve the value of the business

  • Exchange that value for money with the least amount in taxes

  • Meet personal and family needs by providing security and continuity of the business in case of the owner’s premature departure

  • Leave a legacy

  • Give money to charity

  • Shift wealth to children

  • Reward key employees

  • Receive full value for the business

  • Keep the business (or sell it) at his/her exit

  • Take the business to the next level

Step Two: Value the Business

Do you know what your business is worth?  Understanding value is vital if you wish to sell to a third party buyer.  But, knowing what the business is worth will also help in projecting cash flow, estate and gift tax planning, knowing how much insurance to purchase for buy-sell agreements, compensation planning, knowing available collateral for financing, and retirement planning.

Step Three: Plan for Business Continuity

The business owner’s overall planning objective for what will happen when he retires, becomes disabled, dies or sells the business most often includes that the business will continue despite such an event. Most commonly, the business owner will want the business to survive with whoever he chooses to receive the value of his ownership interest. Likewise, if one owner “departs,” for whatever reasons, the remaining owner(s) usually will want to retain ownership and control and not to be in business with the departed owner’s creditors, surviving spouse and/or heirs.  This part of the planning is most effectively accomplished through the implementation and funding of a buy-sell agreement and proper estate planning.

Step Four: Plan for Personal Wealth Preservation and Succession (Estate Planning) and Asset Protection

Universal client objectives are to preserve wealth and minimize taxes using both lifetime and death planning tools. Where a family business is involved, this requires integrating lifetime succession and business objectives with the estate plan. Estate planning thus becomes part of business planning.

Considerations for the business owner’s estate plan include the growth of non-business assets; how to be “fair” to children both inside and outside of the business; minimizing and having the cash to pay estate tax; asset protection during the owner’s life and for his heirs; probate avoidance; planning for long term health care costs; and sometimes special considerations, such as a child or parent with special needs.

Step Five: Grow and Protect Business Value

From the owner’s perspective, growing the business and protecting its value will maximize the amount realized on the sale of the business, protect assets from potential business and personal creditors, create the ability to sell the business, and can motivate and keep key employees and family members in the business.

Promoting its value will include increasing cash flow; developing operating systems (so that the system, not the owner, who will eventually be gone, becomes the solution); documenting sustainability of earnings (if the owner is taking all the cash out of the business, it will be harder to sell); improving company performance as measured by industry metrics; and paying down debt.

To grow the business and protect its value, it may be necessary to restructure the organization, solidify and diversify the customer base, implement strategies to grow the company, develop and protect proprietary technology, build a solid management team, and groom a successor.

It may also be worthwhile to examine and possibly change the corporate structure (S and C corporations, LLCs and partnerships).  A good advisory team can help the owner consider tax pros and cons, ease of operation and asset protection features of current and potential entities. An umbrella policy is often overlooked by business owners and is an inexpensive start toward asset protection of both business and personal assets.

Step Six: Ownership Transfer

The ability to sell and the value of the business are both affected by intrinsic factors (e.g., how the business has grown); extrinsic factors (e.g., the local and general state of the economy); and the effectiveness of the sale process.

There are only two basic types of ownership transfers – to those who are in the business (including family) and to outsiders. Each has special characteristics.

Sale to Outside Buyers (Third Parties): The benefits to the owner of a sale to an outside buyer can include cash at closing, no owner financing (which eliminates financial risk), no family succession issues and the speed with which the exit can occur. However, everything must come together just right to successfully complete the sale of a small business.

Sale to Children or Key Employees: The owner’s succession objective may be selling the business to his children and/or key employees. This can motivate and help retain key employees and family involvement in the business. Money for that kind of sale usually has to come from the ongoing business, so planning is critical to help reduce risk of buyer default and to increase the amount of money received by the owner.


Depending on the health of the business and the objectives of the business owner, it can take several years of planning and action to implement a business succession plan and get the other planning in place. A forward thinking advisory team and business owner will initiate the planning process years before an anticipated succession event, monitors the progress, and helps keep the plan on track.

This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader