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The Practical Math of Succession

Terry Mullen
Jan 4, 2017

You have spent a lifetime building a successful financial advisory practice from the ground up. You worked day and night to make sure your new venture succeeded, and you always put the best interests of your clients first when making investment recommendations. You helped your clients build their workplace plans and IRAs into solid nest eggs for their retirement years, and now it is your turn.

Now that your retirement is fast approaching, it is time to get serious about succession planning. Planning this kind of transition can be tough, with many factors to consider and many pitfalls to avoid. Some of the most significant roadblocks are financial in nature, and assessing the financial implications of your plan is essential.

One of the most critical economic components in your succession plan is the value of the business itself. Until you know what the practice is worth on the open market, it will be difficult to create a comprehensive succession plan. No matter where you are in the succession planning process, it is important to seek expert help and guidance in valuing your business. Your practice may be priceless to you and your clients, but you still need to set a fair market value before you can move forward.

Once you know what the business is worth, you can move on with a decidedly less pleasant topic. Depending on the value of your business and the succession structure you put in place, estate taxes could eat up a significant portion of the legacy you have worked so hard to build.

If you are not already doing so, you should seek professional help and guidance to minimize the tax hit and avoid other financial roadblocks. You may be an expert at running your business, but chances are you are not a tax expert as well. A good consultant can work with you to minimize any taxes due upon your death. That tax minimization plan will maximize the value of the firm for the next generation.

If you are the owner of a family business, you can look at freezing the current value of your financial interest in the firm and transferring ownership to your children. This can be a smart tax minimization strategy, especially if plan to pass the business on to your children.

This tax minimization strategy does require some reorganization, and it is a good idea to seek expert help and guidance as the process moves forward. This common business succession strategy starts with an exchange of common shares for preferred shares with a fixed value. The fixed value of those preferred shares is equal to the common shares being exchanged, but the strategy allows the business owner to pass on both capital appreciation and future tax liability to the children.

The beauty of this strategy is that it allows you to retain control over the operation of the business. While ownership of the common shares is transferred to your children, you are still responsible for, and in control of, the day to day operations of the firm.

No matter which tax minimization strategy you decide to use, it is important to start the succession planning process early. Experts recommend starting the succession planning process a minimum of five years in advance, as this will give you time to work out the details and establish a written plan for turnover of the business.

Once that written succession plan is in place, you can use it as a blueprint for the future operation of the business. Having a solid blueprint to work from is essential, as it will guide you going forward and give your chosen successor a firm starting point.

Whoever your chosen successor may be, it is important to keep the lines of communication open throughout the entire process. Keeping the principals involved and informed is always important, but it is even more essential when passing on a family business.

Even a simple misunderstanding could create all kinds of family squabbles and make the transition process much harder than it needs to be. By keeping the lines of communication open, you minimize the odds of costly misunderstandings and hurt feelings.

It does not matter if the implementation of your succession plan is around the corner or still years away. Your written plan should include detailed information on the practical math of the succession, from how the taxes will be calculated and paid to how the ownership shares will be distributed. A detailed plan is always better than a basic one, and you should spell out your plans as precisely as possible.

You have worked hard to build your business and serve your clients. As a responsible business owner, you want to know that your employees, your clients, and your legacy will continue to thrive long after you have retired. Establishing a solid succession plan, one that identifies and addresses all financial issues, will protect you and the successor you have worked so hard to identify.

More articles related to: Succession Planning

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