Skip to Content

Protecting your business and your wealth

A succession plan charts a path for your eventual departure from your business, reducing uncertainty for future stakeholders while helping you achieve goals for your business and family.

Three people looking at a laptop in a manufacturing shop.

For all the attention you give your business, you may be overlooking one critical component — planning for what will happen when you’re no longer leading it. A good succession plan answers the question “Who’s going to take over the company?” while also helping to preserve and enhance the value of the business and your legacy, says Javier Romero, Head of Business Owner Strategy in the Planning Center of Excellence at Bank of America Private Bank.

Romero works closely with business owners to identify personal wealth and estate planning opportunities, from structuring the business to preparing business owners and their families for business-related liquidity events. Here, Romero discusses important considerations for creating a succession plan that integrates business and personal goals.

Headshot caption: Javier Romero, Head of Business Owner Strategy in the Planning Center of Excellence at Bank of America Private Bank

Javier Romero, Head of Business Owner Strategy in the Planning Center of Excellence at Bank of America Private Bank

What is succession planning, and why does every business owner need to do it?

A comprehensive succession plan not only addresses what will happen when you leave your business or pass away, but also anticipates a range of other possibilities, such as incapacity, divorce or the exit of a business partner. The objective of a good succession plan is to preserve value, and even increase it, by reducing uncertainty.

This may be accomplished in part through the use of buy-sell agreements, incentive compensation plans, life insurance, ESOPs or other solutions. But, importantly, it also involves deciding who within your family will control, manage or benefit from the business. Settling those issues with the appropriate solutions can reassure not only your loved ones but also other future stakeholders regardless of how and when you exit.

In short, succession planning is part business planning, part exit planning and part estate planning, and you should review both business and personal documents, such as wills, powers of attorney and trusts, periodically with your advisors.

What are the risks of not having a succession plan?

Whether you’re aware of it or not, you already have a succession plan. Many business agreements, for example, include provisions that address who can control certain decisions in your absence. There may be documents, created when your business was founded, that name your spouse or another family member as your successor. Do those still make sense today, when the company may be far more robust and complex? Are family members the right people to oversee management and make executive-level decisions?

Or perhaps you started the venture as a sole proprietorship, and entity agreements were never prepared or fully executed. Without them, the fate of your business could be determined by your will, a prenuptial agreement or the laws of your state.

Consider how the lack of a documented succession plan affected a business owner who was married twice, with children from each marriage. While running a large and profitable business, he employed various children and even the ex-spouse, who was instrumental to the business’s operations. But when he died unexpectedly, his lack of a formal succession plan meant there was nothing to ensure that the business would continue to be managed according to his vision, or that certain family members would remain employed.

Adding to the upheaval, the children who were involved in the business wished to continue its expansion, while the others preferred an immediate sale. There had been tentative plans to have the interested family members buy out the others, but life insurance, which could have funded that transaction, had never been obtained.

How else does estate planning factor into business succession planning?

Many business owners consider estate planning and succession planning to be two entirely separate concerns. They may think estate planning means having their lawyer prepare a “simple will, nothing complicated,” and they assume that their business lawyers have taken care of everything on the succession planning front. But the reality may be very different.

A privately held business will oſten represent your largest and most complex financial asset. It’s also typically illiquid, with its value determined by a series of inputs from your hard work and time to contracts, employees, vendors and clients. In your absence, will your family, through estate administrators, executors or trustees, be equipped to take ownership of such an asset with complicated obligations and potential liabilities?

An expert on estate planning can help shed light on considerations that are critical to succession planning. For example, should you consider designating fiduciaries, such as trustees with business experience, to oversee the company alongside family members? Given its future valuation, will your estate, or the company, have the liquidity to pay any estate taxes that may be due nine months from your death? Even considerations such as business entity forms, ownership and tax profile may necessitate special provisions in wills and trust agreements to comply with business terms, reduce taxes and relieve burdens on your family.

Are there other ways a business succession plan can help protect your family legacy?

Likely your largest source of wealth, a closely held business may also be the asset with the greatest potential for appreciation, and this makes it ideal for transferring wealth to the next generation.

A giſt or transfer of business interests to a custom, irrevocable trust, for example, can be highly tax efficient in passing the wealth you’ve created in your enterprise to your family, while keeping control in your hands now or with the family aſter your death. And importantly, the IRS allows valuation discounts when transferring minority interests in closely held businesses, and if that transfer happens during a company’s initial stages, before you’ve expanded or even contemplated an exit, it removes not only current value from your estate but also future appreciation, so that the giſt grows tax-free for the family’s benefit.

A trust may have other benefits as well. If your children have varying levels of wealth, or if only some want to participate in the business, a trust may provide an equitable solution while serving as a safeguard against potential creditors. Also, the careful selection of trustees and other fiduciaries can bolster the number of advisors who provide business and family guidance, without jeopardizing the family’s control and access to funds.

When should the planning process begin?

It may feel counterintuitive to devote valuable time today to unknown future issues, especially if you’re in wealth-creation mode. Succession planning, however, should begin as early as possible.

If you hope to keep the business in the family, or you’re an entrepreneur with a sale or IPO as the endgame, it will take time to identify, nurture and establish future leaders. Add the complications of family dynamics, the needs of other stakeholders and the importance of documenting changes in your plans, and the process may become very involved. Give it the time and care it deserves.

Remember that succession planning isn’t just about the future. It can also add real value, measured in present-day dollars, and increase liability protection, providing peace of mind about securing your family’s future and your legacy.

How can Bank of America help with your succession plan?

We have a team of highly experienced wealth planning specialists who can help you protect what matters to you most, your family, your business and your legacy. We work alongside your other advisors, including your personal planning attorney and accountant, your business attorneys and accountants, and commercial bankers to help create a succession plan tailored to your circumstances.

Speak with your client team about charting your business succession plan and coordinating other parts of your personal wealth planning.

Related Insights