Partnership for the Good of Your Business

Preparing for succession when heirs prefer to not run a business

| Jul 22, 2021 | Business Succession |

When heirs appear unwilling, business owners may prepare for their companies’ future management by adding a non-familial successor to their estate planning documents. An individual with suitable skills and the ability to develop new ones could contribute to a smooth transition, as noted on the Kiplinger.com Business page.

Because it could take several years to prepare for a leadership role, an owner may include business succession as part of a retirement plan. It may, however, require working with the chosen successor until he or she develops a sufficient degree of company experience. During the transition, a current owner has the advantage of choosing to continue receiving income from the company.

Succession may require a new business structure

According to the Exit Planning Institute, approximately 30% of family-owned enterprises last beyond the second generation. If heirs express a preference to not manage a family enterprise, owners may need to consider how it could affect business operations.

By choosing a motivated successor to manage a company, owners can reinforce their confidence in its continuation should they become ill or incapacitated. An estate plan may include business restructuring that names a successor as a business’s manager while noting beneficiaries as recipients of its income.

A lack of succession planning may result in a business sale

Without a successor, heirs may decide to sell an inherited business. As noted by SmartAsset, heirs may pay capital gains taxes based on a company’s fair market value on the day of the owner’s death. Preparing for a new owner before death, however, may minimize the risks of heirs incurring tax liabilities or selling a business for less than its worth.

Estate plans may include strategies for owners to exit a business. Naming a successor as part of a business owner’s retirement planning can help pass income on to heirs without relying on them to manage the enterprise.

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