Business Succession Planning

When Businesses Retire…

Convincing business owner clients to plan for their own exit might require that they first start thinking of themselves as ‘expendable’

by Herbert K. Daroff, J.D., CFP, AEP

Mr. Daroff is affiliated with Baystate Financial Planning, Boston Ma. Connect with him at

For most owners of privately-owned, closely-held, or family businesses, the value of their business is the largest asset in their estate. Yet, very few have an exit strategy. Why?

Because, most business owners say, “if I die …” Like they have a choice. They have not planned for the succession of ownership or of management.

Why don’t business owners plan for their exit?
• Forces them to think about dying — their own mortality
• They don’t know what they would do without the business
• They don’t think the business can survive without them
• Exiting the business is like giving up one of their children

You only have three choices: keep it, sell it, or liquidate it. Or, more eloquently:
• Close the business before you die
• Die with it and let the family figure it out
• that’s the Demoulas Plan — how did that work out for them?
• or, that’s the Joe Robbie Plan — sell assets that it took a lifetime to create in order to pay estate taxes
• Sell it (to insiders or outsiders) or Transfer it (to family) during lifetime
• that’s what Sam Walton did
• as a result, there are 7 Waltons on the Forbes list of the wealthiest people in the world

It is estimated that 80% of business owners plan to sell their business, but only 20% ever sell.
It is estimated that one-third of these business fail to make it to the second generation. Half of them then fail to make it to a third generation.

How do we cure family business mortality?
It requires a combination of many tools:
• family continuity and business continuity
• management succession and ownership succession
• it is an interdisciplinary process of accounting, law, financial planning, banking/finance, and psychology

A Succession Outline

Who’s going to own (or run) your business (or professional practice) after you?

The key is to focus on management succession.  Ask, “who’s going to do your job?”  That is a much less emotional question than ownership succession.  Say, “this is the only chance you will have to be you own executor (personal representative).”  WHAT will the business look like the first day you don’t show up and won’t be back?  WHAT will it look like 6-months later?  How about a year later?  So, create a FIRE DRILL.  Then shift the conversation to ownership succession.

Who is the best person to sell your business?  YOU

Who is the best buyer for your business? 

 Inside (some or all employees, or transfer to family members)

 Outside (competitor)

Why should you have an exit strategy?  Because you don’t know when you might pass away or become disabled for an extended period of time.  Or, when a close family member (e.g., parent, spouse) may become disabled that makes it difficult or impossible for you to continue focusing on your business.  You need an emergency plan.

When should you develop an exit plan?  The best time is RIGHT NOW, regardless of what stage your business is in.

Stage 1 is start-up

Stage 2 is survival

Stage 3 is growth

Stage 4 is maturity

Stage 5 is either decline, or re-invention

What are you selling or transferring?  It’s not about selling S-Corp vs. C-Corp stock vs. assets.  It’s like selling or giving away a child?  Which child would you be willing to part with?  It’s very emotional.  If you sell during lifetime, “What will you do the following Monday morning?”

How do you transfer VALUE while keeping CONTROL and INCOME?  A young man named Sam started a little department store outside of Little Rock.  He retained 1 voting interest and transferred 99 non-voting interests.  He retained control and income.  But, removed most of the value of Wal-Mart from his estate.  You, too, can sell or transfer non-voting interests.  On the other hand, Joe Robbie died without a plan.  His family sold the Miami Dolphins and Joe Robbie Stadium to pay estate taxes.  Do you want a Sam Walton plan or a Joe Robbie Plan?  You have a Joe Robbie plan now.  NO PLAN.


Case Studies

Majority business owner in his 80s. Other family members own minority interests. But, he continues
to run the day to day operations

I suspect that he has been working full time since he was a teenager. What is he going to do the Monday morning after a sale? The key here is NOT tax, legal, or financial. It is people issues. Does he have any hobbies? Does he have any interests outside of the business?

But, if he does not plan, what will happen to his family business, and to his business family? You don’t want to have a fight like the Demoulas Family.

Father in his 70s owns 100% of a business that his son is now running
I had a case where a 65-year old son walked into my office. He owned one-third of his family business. His 95-year old father owned the other two-thirds. Just didn’t think the kid was ready yet. Most of us know that we work from January 1st to about April 15th for income taxes. Tax Freedom Day. We explained that Tax Freedom Day for this family was more like October 15th. They were working from April 15th to October 15th for estate taxes. What did father want? CONTROL. Father could have retained one voting share (acceptable for S-Corp or C-Corp) and transferred the remaining value out of his estate, and retain CONTROL.
We believe that the government needs the money. We just prefer having other advisors’ clients pay for it, not ours.

I suspect that he has been working full time since he was a teenager. What is he going to do the Monday morning after a sale?

Two brothers bought out their third brother
The two brothers could have created a trust to buy out the third brother, removing that value from their taxable estate.
With or without that trust, there is a need for a buy/sell agreement between the remaining two brothers. Traditionally, this situation results in:
• one-third of the business value being included in the estate of the first brother out.
• Then, one-half of the business value included in the estate of the next brother out.
• And, finally, the full business value included in the estate of the last man standing.

Why allow the government to tax 183.33% of the business value in this generation?
Both remaining brothers could create an irrevocable trust. The trusts could have bought out the first brother, and be in a positon to buy out the second brother. That would leave the third brother owning one-third in his estate, and two thirds out of his estate. The last brother could still have full control by retaining the power to remove and replace the trustee. Or, the last brother could own one voting interest and shift all of the non-voting interests out of his estate. ◊