In this December 2018 issue, you will find the following articles:

 - Cameron Kelly

- Tim Bergman, CPA 

 - Aaron Sundeen



Business owners are busy.  Starting, running, and growing a business takes time, and normally carries the business owner well outside of the bounds of a normal 9 to 5 business day.  It should therefore come as no surprise that most business owners have no succession plan.

What is a Business Succession Plan?

Business succession planning is the process of deciding how to transfer your business.  Ideally, succession would occur at the business owners retirement, but thought should also be given to what would happen if the owner dies or becomes disabled. 

There are many pieces to a good business succession plan, but a good starting point is to consider: 1) who will manage the business, and 2) who will own the business.  Often the same person would both own and manage the business, but that is not always the case. 

Example 1:  Consider a business with a long time key employee.  The employee has worked for the business long enough to learn all aspects of the business, and understands the operation of the business nearly as well as the business owner.  That employee might be an ideal buyer when the business owner decides to sell.  Alternatively, that key employee might make the business more valuable for a sale to a third party, or allow the business owner to transfer ownership to a child who is not ready to operate the business.

Considering the ownership and management separately is helpful to the process of logically thinking through the available succession options.  It is also helpful to putting a plan together for getting and retaining key employees, which should ideally occur long before the actual succession.

Transferring the Business to a Family Member.

There are many ways to transfer a business.  The method used is often dependent on who will receive the business.  Deciding whether the recipient of the business will be a family member is often difficult, but must be addressed.  The need to decide which family member receives the business can be even more challenging.

Example 2:  A business owner has a manufacturing business held in an operating company, and a second company, which owns the building where the business is located.  The owner has three children.  One of these children has worked at the business for 10 years.  The second has worked at the business on and off, but is currently employed elsewhere.  The third has never worked at the business, and appears to have no interest in working there.

Give this situation, the business owner might decide that the first child is the logical successor to the business.  However, because a business often comprises a large portion of the business owner’s assets, it might be difficult to give the business to one child, while treating the other children equally.  It might be possible for the first child to purchase all or part of the business, to help with the treatment of the other two children.  In these cases, the business owner might need to consider the difference between treating the children equally, and treating them equitably.

Because the owner in this situation has both an operating company and a holding company, the two businesses could be treated differently in the succession plan.  The second and third child might own part of the holding company, but little to no interest in the operating company.

Any time multiple children are involved, it is important to consider the relationship between the different parties.  For example, if the non-participating children are given an interest, how will that affect the relationship between the three children.  In the worst cases, it leads to outright hostility and litigation.  Even if the family gets along well, well intentioned differences of opinion can lead to tension between family members.

Methods of Transferring a Business.

The basic building blocks of transferring a business are a sale or a gift, but how a business is transferred is often driven by circumstances.  For example:

  • Is there a potential buyer for the business, and what is a realistic price?
  • Will the transfer be made to a family member, employee, or a third party?
  • Is the business owner reliant on continued income from the business?
  • When, and under what circumstances, will the business owner step away from operating the business?
  • What will be the fairest treatment for the business owner’s children?
  • What are the income and estate tax consequences of the proposed plan?

In a sale, the business owner will receive compensation for the business.  The compensation might come in a single lump sum payment from the buyer.  In that case, the buyer either has the cash required to make the purchase, or receives a loan from a bank or another party to pay the business owner.  However, it is also common for a business owner to finance part of the deal by receiving installments from the buyer. 

If the purchaser is a family member, the business owner might also consider the option of giving the company to the family member.  A lifetime gift of the company is appropriate where the business owner does not need the funds from a sale for retirement.  If income is needed, a business owner might instead pass their interest at death using a bequest, which is when a business passes as part of the owner’s will or trust.

Income and estate taxes will often be a major factor in the business owner’s succession planning.  If a business is sold during the business owner’s lifetime, the owner normally needs to pay capital gains taxes on the sale.  If the business is instead passed in the owner’s will, the capital gain can be avoided through a step up in the owner’s basis in the company, which basically erases the capital gain. 

In larger estates, the business owner also needs to plan to avoid estate tax.  There are various techniques that can be used to reduce the estate tax burden of the business owner.  This includes strategic gifting, and the use of trusts.  If the business owner has a large estate, it is always worth discussing the potential estate tax consequences with their attorneys and tax professionals early on.

The Importance of a Buy-sell Agreement.

Even if the business owner is not planning to sell in the near future, it is still important to consider some basic succession planning.  Most commonly, that means a buy-sell agreement.  A buy-sell agreement is an agreement for how the business will transfer in the case of a triggering event.  For example, if the business owner dies, the agreement would give another party, or the company, the right to purchase the business owner’s interest.  Buy-sell agreements also cover events like disability, disagreements, bankruptcy and divorce. Buy-sell agreements are often overlooked by business owners as they start their business.

Example 3:  Two business owners start a business.  After five years, the business has become successful, but much of its cash flow is used for growth and debt service.  Owner A, who is married, dies unexpectedly and his will leaves all of his property to his wife.  Both Owner A’s wife and Owner B would prefer not to be business partners, but Owner B does not have the cash flow to purchase her interest.

If the Owners of this business had a well-funded buy-sell agreement, it would benefit everyone. Typically, a buy-sell agreement will provide a method for one owner to purchase the other owner’s interest in the case of their death.  This benefits the surviving business owner, who did not choose to go into business with Owner A’s family.  It also benefits Owner A’s family, who would have a hard time selling their interest to anyone other than Owner B.

This example helps to show the importance of planning ahead.  Succession planning is meant to ensure a smooth transition of the business.  Planning ahead helps to ensure that unexpected events to not result in avoidable problems.  Further, engaging in succession planning can help to identify steps that can be taken to increase the value of a business prior to a sale. It is typically recommended that a business owner take basic succession planning steps early on.  At a minimum, it is important to begin the planning process three to five years prior to an anticipated sale.





In December of 2017 Congress passed The Tax Cuts and Jobs Act which marked the most sweeping rewrite of the income tax code in more than thirty years.  When you filed your 2017 tax return you most likely noticed very little difference from previous years as most of the law changes were effective for the 2018 tax year to be filed in early 2019.  Although it is impossible to cover all of the many changes that result from the new law in this short article, it is hard to imagine any taxpayer that won’t be affected in one way or another by the new rules. 

For many taxpayers, taxes represent the single biggest annual household or business expense.  For those who haven’t assessed their tax strategy recently, I can’t think of a better time than now to re-evaluate your tax plan.

The new tax law creates favorable results for certain members of the business community by incorporating a new 20% deduction for certain passthrough businesses and a lowered C Corporation tax rate.  Some of the biggest changes that will affect most individual taxpayers include a doubling of the standard deduction, limitations on certain itemized deductions, and an elimination of personal exemptions.  Individual tax bracket rates have also been reduced with most tax brackets seeing a reduction of a few percentage points at each income level.  For families the new law calls for a doubling of the child tax credit and expands the number of taxpayers who will qualify for claiming the credit.  These examples are just a few of the many changes that you will notice when you file your tax return in the coming months.

Each individual and business tax situation is unique, and your tax plan should be tailored to those unique characteristics.  A tax advisor can be a valuable resource in these changing times to help you navigate the new rules and to assist you in developing a plan to minimize your tax burden.





With tremendous growth happening in certain business sectors of our country, many businesses are looking to grow their operations in 2019.  But what type of expansion makes the most sense for your business?

The three most common construction approaches for businesses looking to grow their spaces are expansion, renovation or the creation of a new building, either on existing land or in a new location.  Each of these construction types presents a unique set of challenges, but a decision can be made when you consider factors that include budgeting, time frame and the long-term needs of the business.

Whatever direction owners decide to go with will involve a great deal of consideration as it relates to their future plans.  This includes performing a detailed audit of existing space to understand the limitations and benefits of an existing location, which can help guide the decision-making process as it relates to expansion, renovation or new building consideration.  Sitting down with a contractor at this time can be beneficial so the owner can collaborate their ideas and receive feedback on what might work best.

Regardless of which option an owner chooses, there are considerations that need to be determined before proceeding.

Expansion of Current Space

Expansion may be a viable option, but it also requires a lot of coordination of assets during a lengthy construction process.  Expansion is probably the best option when a current business location is vitally important to its employees and customers, as long as there is adequate room for the expansion process.

An on-site expansion often includes renovation of existing space. During the process owners may take advantage of existing space by reconfiguring the layout to accommodate more personnel while construction is going on.  This allows for the business to keep operating while minimizing distractions and maximizing productivity.  Expansion of existing space may be more expensive due to the possibility of having to engage in after-hours work, dust protection concerns and phasing to keep areas of existing space operational during expansion.   Renovating may also result in higher costs once construction is started because of unknown conditions that may be encountered or deficiencies that may be discovered during the renovation process. 

Renovation of a New Space

Purchasing a building, leasing, or using an existing offsite building can bring the same challenges and unknowns as expanding current space, but it does allow a business to continue without the distractions of having an active construction site in operation in their production or work space.  Depending on the level of renovation required, renovating a new space can remove the need for phasing and will allow for construction to be done in a more efficient manner.  Renovation is a good solution when timing is critical, and your business needs to stay operational with limited distractions during day-to-day activities.

New Construction

Building new is an exciting process for owners, as they have the opportunity to create exactly what they want and can start their design with a blank canvas.  New construction is an outstanding solution for companies that may have special requirements and want to plan ahead for future growth.  With new construction, there are likely to be fewer restrictions compared to expansion or renovation.  But sometimes the process can be lengthy when it involves procuring land, plan development, municipal approvals, site work and construction from the ground up.  With new construction the procurement, design, and approval process can take as much time as the construction process itself, depending on the level of the construction complexity.

Whether you decide to expand current space, renovate an offsite building or build new, owners should take the time to consider what is most important to them when it comes to growing their current space.  Location, timing and budget, along with other factors should be examined ahead of time to determine what mode of expansion works best for the business.  Getting a contractor involved early in the process can help guide owners into what solution makes the most sense.  Ultimately as an owner, you want be sure to keep the momentum of your growing company moving while at the same time making the best decision for your future.


We offer a full range of mortgage options.

Apply Now


Stay up to date with what's happening in our world.

View Page