What Options Do Business Owners Have for Transferring Their Company Through Succession Planning?

< Back to Q&A

Why Does Business Succession Planning Need to Start Earlier Than Most Owners Think?

Business Exit Planning should begin years before an owner expects to leave because transition options require preparation. The U.S. Census Bureau reported that more than half of business owners were age 55 or older in its 2019 Annual Business Survey, underscoring how many companies may face ownership changes. Early planning gives owners time to reduce dependence on themselves, document processes, develop management, address concentration, improve financial reporting, and resolve ownership issues. It also creates time to test whether family members or key employees want and can handle leadership. Waiting until illness, burnout, retirement, or an unsolicited offer forces the owner to negotiate under pressure. Valuation weaknesses are then harder to correct, financing choices are narrower, and tax planning opportunities may be lost. Good Business Exit Planning preserves leverage because the owner can compare alternatives, prepare successors, and choose the path that effectively supports goals, employees, family, and the company’s future.

What Are the Main Paths for Transferring a Business to a Successor?

• Family Transfer: Keeps ownership within the family but requires capable, willing successors and clear communication.
• Management Buyout: Transfers the company to existing leaders who understand the operation, although financing and ownership readiness must be evaluated.
• Employee Stock Ownership Plan (ESOP): Transfers ownership to an employee benefit plan that gives employees ownership interest in the company in the form of shares of stock.
• Strategic Sale: May create value through buyer synergies and a strong price, but it can also change the company’s direction.
• Private Equity Transaction: Can provide liquidity while allowing owners to retain rollover equity, although continued involvement is often expected.
• Gift or Partial Transfer: Can support family business succession, but valuation considerations, including a discount for lack of control (DLOC), require proper documentation and support.

What Is a Buy-Sell Agreement and Why Does Every Multi-Owner Business Need One?

A buy sell agreement establishes how an owner’s interest may be transferred and how its price will be determined. Common triggers include death, disability, retirement, termination, divorce, bankruptcy, or an owner’s voluntary exit. The agreement can identify permitted buyers, valuation methods, payment terms, and funding arrangements such as life or disability insurance. Without one, surviving owners may suddenly be in business with an estate, former spouse, or outside buyer. Disputes can arise over control, value, and payment timing when the company is least equipped to handle them. Every multi-owner company should review the agreement as ownership, value, and circumstances change.

How Does the Tax Structure of the Transition Affect What the Owner Actually Keeps?

The headline purchase price does not show what an owner keeps after taxes. The IRS generally treats a business sale as the sale of separate assets rather than one transaction, and each asset may receive different tax treatment, including capital gain, ordinary income, or other tax treatment. A stock sale, asset sale, installment sale, redemption, gift, or rollover can produce different results. Purchase-price allocations, depreciation recapture, state taxes, entity type, timing, and expenses also matter. Personal Goodwill may be relevant in owner-dependent businesses, but it must be supported by facts and transaction documents. Structure should be modeled before terms are finalized, not after final signing.

What Should Business Owners Do Now to Maximize Their Options Later?

Owners can start by defining clear legacy goals, then identifying transfer paths that could meet them. Obtain a valuation and determine which risks, customer concentrations, weak margins, undocumented processes, or owner dependencies reduce value. Review governing documents, estate plans, insurance, employment agreements, intellectual property, and restrictions. Assess potential successors, including their interest, leadership ability, financial capacity, and development needs. Build a management team that can operate without the owner and improve reporting. Create a timeline, assign responsibilities, and revisit assumptions annually. Coordinate valuation, tax, legal, wealth, and operational planning before a triggering event turns a strategic decision into an emergency.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Gina Miller, partner in Bennett Thrasher’s Business Valuation Practice, or call us at 770.396.2200.

Back to Q&A