Business Longevity and How to Plan for the Next Generation


Kyle E. Gallo is an associate at MacDonald Illig Attorneys. He is a member of the Firm’s Trusts & Estates and Business Transactions Practice Groups.

There are several factors to consider when planning for the future of a business. Proper planning requires an understanding of the desires of the owner and the needs of the business. Oftentimes, the owner would like to transition the business to the next generation. In doing so, the owner should consider the following:
Ownership Agreements
The first area of consideration is to review the partnership agreement, operating agreement or shareholder agreement (the “Ownership Agreement”) of the business. It can address and answer or provide options for important questions such as who can and cannot be an owner, how a person or other entity can become an owner, and the terms surrounding a potential buyout. The Ownership Agreement will provide the succession plan for the business in the event of an unexpected circumstance. It
is crucial to the future success of the business to have such an emergency plan in place.
Transfers During Life
Once the Ownership Agreement is updated, the owner can then begin to consider a planned transition of the business. As an owner, it is difficult to determine when the right time is to end the business or to let the next generation take control of its operations. After years of creating client connections, working with the employees and being up to date on every event that affects your business, it can take time to feel as though you are ready to make the transition to the
next generation.
By transferring your ownership interest over time during life, it can lead to a gradual transition of the day-to-day control of the business, while the owner maintains the legal control of the entity. This allows the owner to evaluate the next generation’s ability to operate the business before making a complete transition. Before making any gift, the owner should carefully discuss the pros and cons of such transaction with his or her attorney and accountants. The manner in which the business is transferred can have significant income, gift and estate tax consequences.
Estate Planning
Sometimes an owner desires to maintain ownership of the business until death. Often this is for cash flow reasons in retirement or to obtain a step up in tax basis for income tax purposes. If this is the case, the owner should carefully consider the provisions of his or her Last Will and Testament. Through the Will, the owner should specifically direct where ownership interests are to be transferred. Failure to do so may lead to family disputes and a potential forced liquidation of the business. Forced sales often lead to the lowest business value for your beneficiaries.
The process of planning for the future can take a considerable amount of time. The purpose of this article is to merely start the dialogue. Every owner wants his or her business to succeed, but the definition of success differs.
It is never too early to begin to document what success in transition means to you.
For questions about legal matters, please contact MacDonald Illig Attorneys at 814/870-7600 or