June 2013

planning for Success in Succession Planning

by Todd N. Hallock


Studies have demonstrated time and again that small, privately-held businesses continue to be the central force in the U.S. economy for job creation and growth.  However, despite the success of small businesses, the Achilles heel continues to be succession.  Many of the same studies have shown:

       Little more than 30% of family businesses survive into the second generation

       By the third generation, only 12% of family businesses will still be viable

       This number shrinks to 3% at the fourth generation and beyond

 What are the consequences of these failures?

        Families lose their investment

       Employees lose their jobs

       Communities lose tax base

 The reality is that whether you are just starting out or have been in business for fifty years – you will leave the business.  You will retire, you will become disabled or you will die.  No business has escaped this truth.  The successful owners, the ones that are not only able to benefit from the income generated by the business, but also realize the value when exiting, are the ones who have planned for success in succession planning.

 What is Succession Planning?

Before proceeding, it is important to understand what is meant by succession planning.  For each business owner this definition may be a little bit different, but generally, succession planning can be defined as a process of decision making that:

        Protects the ongoing viability of the business operation;

       Provides for the orderly transition of the business operation to new ownership;

       Results in the least amount in taxes; and

       Preserves family harmony

 This definition can be a guide in developing your succession plan.

 The Steps

An important concept to understand about succession planning is that it is not a single event.  I emphasize the word process in my definition to highlight this fact.  Rather, it is a series of steps, taken over time, capable of being altered as needed to meet changing circumstances. 

 Step 1 – Surround yourself with good advisors.

Early missteps can be the death knell for even the best business ideas.  Take the time to surround yourself with quality advisors (legal, accounting, financial, insurance) and meet with them regularly.  Depending on the size of the business you should seek to meet with these advisors, as a group, at least annually.  This group meeting should be in addition to any individual meetings.  You want to make sure that your advisory team is coordinating the advice being given.      

 Step 2 – Determine your planning objectives.

While some things, such as death or disability are unknown, you can still establish early on a target retirement date.  While this may need to be adjusted from time to time, it allows you to set interim goals and objectives which will make meeting that target date much more likely.  Also take time to consider retirement income goal.  This will allow your retirement planning to be more meaningful as you seek to meet that goal. 

 Step 3 - Choose the right entity.

There are many different forms a business can take depending upon the goals and objectives of the owners.  Choosing the wrong type of entity can be very expensive and very difficult to undo.  Generally speaking, owners should be wary of engaging in businesses as a sole proprietor or in a general partnership because of the unlimited personal liability of the owner for the debts and liabilities of the business.  The most common entity choice will be either a corporation or limited liability company (LLC).  The larger question is how will the entity be taxed?  Corporations can be taxed as a C corporation or an S corporation.  An LLC can be taxed as a C corporation, S corporation, partnership, or sole proprietorship.  Ultimately, the type of entity chosen will be driven by tax considerations, asset protection, flexibility, and integration with the estate plan. 

 Step 4 – Indentify potential successors.

When it comes time for the owner to leave the business, one of four options is going to be available:

        Sale and/or gift to a family member;

       Sale and/or gift to a key employee or co-owner;

       Sale to a third-party; or

       Liquidation of assets

 Liquidation is almost always the worst option.  A sale to a third-party can often reap the best return, but can be difficult to achieve.  Each potential purchaser brings its own challenges and consequences, especially an intra-family transfer.  But, early identification of a key employee or family member provides the opportunity to groom the successor and plan for the best tax outcome.  Additionally, an early determination that the sale will be to a third-party will allow you to take actions that will increase the likelihood of finding a qualified buyer. 

 Step 5 – Maximize your most valuable asset.

For most businesses, the most valuable asset is their key employees.  Consider establishing non-qualified deferred compensation plans to tie those employees to the company.  Be careful when considering an offer of equity.  Any transfer of ownership should be done with caution and with the ability to re-acquire if things don’t go as planned.

 Step 6 – Determine the value of your company.

With your advisory team, establish a formula for valuing the company and regularly do so.  Understand that there will likely be a different formula used when valuing the company for estate or gift tax purposes as opposed to valuing the business for sale.  As you begin to truly understand the value of your company, you will be in stronger position to strengthen areas of weakness in the business and negotiate a fair price at the time of sale.

 Step 7 – Don’t neglect estate and wealth planning.

Throughout the process there must be the recognition that death or disability may cause an early termination of your participation in the business.  Proper estate and wealth planning can act as a catalyst to ensure that an orderly transfer occurs regardless of whether or not you are there to shepherd it along.  Such planning can also minimize the impact of estate taxes and other administration costs.  Assuming you are able to retire as planned; retirement can last for 20 to 30 years.  Your wealth planning should allow for financial independence during this period.  Money should regularly be set aside and invested outside of the business into diversified worthwhile investments.


The great John Wooden once said: “Failure to prepare is preparing to fail.”  The story goes that each year he would start his first practice by teaching his team the proper way to put on their socks and then the proper way to tie their shoes.  It is purported that on the first day of training camp Vince Lombardi would hold up a football to men who had played the sport for years and explain that “this is a football.”  And from there took the team step by step through all of the basics.  The same wisdom that led these coaches to great heights applies to you as a business owner.  Success is in the planning and it is in the details.  These things will not necessarily just work out.  Wherever you are it is time to begin preparing for success in your succession plan.  


Todd N. Hallock is an attorney and founding shareholder with the law firm of Hallock & Hallock, a professional corporation.  Todd serves clients throughout Utah, Idaho and Arizona in the areas of Estate Planning, Business Planning, Asset Protection, Farm & Ranch Planning, Charitable Planning, Special Needs Planning, Trust Administration and Probate.