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Financial
Oct 14, 2021

Business Succession Planning: Three Issues To Consider

Sponsored Content provided by Paul Patterson - Senior Vice President–Wealth Management Financial Advisor, UBS Decision Point Wealth Consulting

After working many years to grow a business, many owners wish to exit the business and transfer the reigns to other family members. In such situations, effective business succession planning is critical for the long-term success of a family business. Some key points to consider when planning for business succession is listed below.

CONTROL

The business owner must determine the appropriate time frame for transitioning control of the family business to the next generation. This is often a difficult and emotional decision because the owner likely spent a lifetime building the business and views it as representative of his or her “life’s work.” A business succession plan may include an initial transfer of a minority interest or non-voting interest to the next generation as a first step, allowing the owner to maintain control while beginning the process of transferring economic value over time. After an initial transfer of non-controlling interests, the owner may begin transferring controlling interests. It is imperative that the first transfer of a controlling interest take place at a time when the owner is fully ready to cede control (as opposed to transferring control solely for tax planning purposes), since family tensions can arise if the senior generation is not in fact ready to transfer control to the next generation. The owner should keep in mind that the structure of the family business (i.e., limited liability company, limited partnership, or corporation) may affect the manner in which transfer of control may be achieved and should be considered when creating the succession plan.

FUTURE LEADERSHIP

Choosing a successor is a critical component of a business succession plan. If one family member has been involved in the day to day operations of the business and has taken an active role in growing the business, they may be the obvious choice. However, when several family members have been involved in the business over a period of time, the decision of who should take the reins becomes more difficult. Regardless of the ultimate choice of successor, the process for selecting the managers of the business should be addressed in the business organizational documents and adhered to going forward.

Issues involving non-active family members: The owner should consider whether or not to benefit all family members equally when transferring business interests and in what manner to involve or benefit family members who have not been active participants. For example, the owner may choose to transfer family business interests to a child who is involved in the business and other assets of equal value to a child who is not involved in the business. While equalization of transfers is possible, it requires careful and consistent valuation of the business interests and other assets, and various tax and legal implications must be considered when attempting to achieve equal treatment of participating and non-participating children. Life insurance can play a key role in equalization.

CONTINUING COMPENSATION FOR RETIRING GENERATION

When transferring ownership and management, the owner may want to provide for his or her future income. Continuing compensation for the retiring generation should be addressed in the business succession plan to meet the owner’s cash flow needs going forward. Your financial advisor can help you understand your cash flow needs after your exit from the family business.

Income taxation of continuing compensation should be carefully considered when structuring the business succession plan since receipts characterized as “salary” and receipts characterized as “distributions” from the business will be treated differently for income tax purposes. Business owners should discuss these issues with their tax advisors prior to creating and implementing a business succession plan.

CONCLUSION

The key to successful business succession is careful planning and communication between the owner and his or her intended successors. Decisions should not be solely motivated by income and transfer tax implications; long-term family goals and values also must be taken into account.


Content from UBS Advanced Planning Group.

This report is provided for informational and educational purposes only. Providing you with this information is not to be considered a solicitation on our part with respect to the purchase or sale of any securities, investments, strategies or products that may be mentioned. In addition, the information is current as of the date indicated and is subject to change without notice.

Neither UBS Financial Services Inc. nor its employees (including its Financial Advisors) provide property and casualty insurance, tax, or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy or investment, including any estate planning strategies before you invest or implement.

As a firm providing wealth management services to clients, UBS Financial Services Inc. offers investment advisory services in its capacity as an SEC-registered investment adviser and brokerage services in its capacity as an SEC-registered broker-dealer. Investment advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. It is important that clients understand the ways in which we conduct business, that they carefully read the agreements and disclosures that we provide to them about the products or services we offer. A small number of our financial advisors are not permitted to offer advisory services to you, and can only work with you directly as UBS broker-dealer representatives. Your financial advisor will let you know if this is the case and, if you desire advisory services, will be happy to refer you to another financial advisor who can help you. Our agreements and disclosures will inform you about whether we and our financial advisors are acting in our capacity as an investment adviser or broker-dealer. For more information, please review the PDF document at ubs.com/relationshipsummary.

Approval Code: IS2102976, Expiration Date: 5/31/22


William "Paul" Patterson, CIMA®, CEPA, CPWA® serves as the portfolio manager for Decision Point Wealth Consulting and oversees client's investment portfolios. In addition to being a Certified Investment Management Analyst,  he is a Certified Private Wealth Advisor (CPWA®), a certification that focuses on solving affluent clients' complex needs beyond managing a portfolio and to provide the range of specific skills necessary to meet the needs of high-net-worth clients.

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