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End-of-Life Business Succession Planning Strategies

By: Leigh Morgan • Edited by: Katelynne Shepard • Subject Matter Expert Reviewed by: Kris Lamey • 9 cited sources • Updated Oct 14, 2024

If you own a business, succession planning is an important part of your end-of-life preparations. Having a solid plan in place ensures that the business can continue in your absence, preserving your legacy and making it easier for loved ones to honor your wishes.

Business succession planning also enables you to make family members, friends, and colleagues aware of your plans, minimizing potential anxieties or uncertainties when it comes to implementing your succession plan. Instead of feeling upset or shocked, loved ones can focus on transferring ownership or continuing to operate the business.

Key Takeaways

• Succession planning allows you to specify what happens to your business when you pass away.
• Developing a succession plan protects your legacy and prevents conflict among employees and loved ones.
• A succession plan is an important part of your overall estate-planning efforts.
• Your plan may have tax implications for your heirs, so seek advice from a qualified business succession planning attorney.

What Is Business Succession Planning?

Business succession planning is essential for understanding the value of your company and preserving as much of that value as possible^[1]. A detailed succession plan also makes it possible to pass your company to a family member or transfer business ownership to someone who will keep it running long after you retire or pass away.

A succession plan is helpful in these situations:

• A business owner passes away suddenly.
• You develop a serious illness that limits your ability to run the business at full capacity.
• You want to retire, but you don’t want to cease operations completely.

Who Should Do It & Why Is It Important?

Anyone who owns a business can benefit from creating a succession plan as part of their end-of-life planning efforts. However, succession planning is especially helpful if you have a terminal illness, you’re planning to retire, or you develop a chronic health condition that prevents you from working full time.

Succession planning is also ideal for individuals who own family businesses. When you work with family members, you have to consider their feelings as well as the value of the company. Family business succession planning makes it easier to set expectations and prepare family members for the next chapter.

Planning ahead for business succession has several benefits:

• You don’t have to worry that your business will disappear after years of hard work and sacrifice.
• You can designate specific family members to manage the business, ensuring that your legacy continues.
• You won’t leave your family members without a source of income, giving them extra financial security.

How a Business Succession Plan Works

An effective succession plan prepares your company for the future, ensuring there are no surprises when you pass away or step down from your leadership role. The planning process has four steps, all of which are critical for preserving your legacy.

Choosing the Right Successor

First, you need to choose the right successor. If it’s a family business, consider having your child, spouse, or sibling take over. Another option is to identify top performers and ask one of them to be your successor.

If you don’t want a family member or current employee to succeed you, look outside the company. You can either hire a new manager or list your business for sale.

You love your family, and maybe you’ve included some of them in your business. When it comes to deciding who will hold the reins, you have to do what’s best for the company, even if that means providing for loved ones in other ways.

Kris Lamey, MBA

Properly Valuing Your Business

Next, you need to determine a fair and accurate value for your business. Establishing a value now makes it easier to facilitate a transfer later, so consider using one of these methods:

• Asset-based. Asset-based valuation considers the value of tangible and intangible assets to determine the overall value of a company. This method works best if you can easily separate one asset from the others^[2].
• Income-based. The income-based approach estimates the value of a business by considering how much income it’s likely to generate in the future^[3].
• Market-based. Market-based valuation estimates a firm’s value by comparing it with similar companies^[4]. This method relies on key financial metrics.

No matter which method you choose, you must get a professional appraisal to ensure objectivity. Professional appraisers are extremely precise, which is crucial for financial and tax purposes.

Developing Your Business Transition Plan

Now, you can develop your business transition plan. At minimum, the plan should include a list of key roles and responsibilities, along with a timeline for the transition. To ensure a seamless handover, make sure you document critical processes and spend plenty of time training your successor. If possible, transfer your responsibilities gradually to prevent the successor from getting overwhelmed and rethinking their role in your succession plan.

During this stage of the planning process, it’s important to communicate regularly with employees, customers, vendors, and other stakeholders. Maintaining open lines of communication builds trust and enhances stability.

Financial Planning and Tax Considerations

Finally, think about the financial and tax consequences of transferring your business to someone else. If you sell the company, you may have to pay long-term capital gains tax of up to 20%^[5]. Your state may also impose a tax on the proceeds of a business sale. For example, California, New York, and New Jersey all have marginal income tax rates exceeding 10%^[6].

Gifting the business to a relative won’t necessarily help you avoid taxes, either. Depending on the value of the business, you may have to pay federal gift tax^[7]. Your heirs may even have to pay estate tax if the transfer occurs upon your death.

You may be able to minimize your tax burden by selling the business to an employee or investing the proceeds in an opportunity zone, but seek advice from a tax professional and a licensed attorney before you make any decisions^[8].

Once you have a plan in place, make sure you update your will or trust to reflect the terms of any buy-sell agreements you negotiated during the planning process.

Protect Your Legacy with Succession Planning

Creating a succession plan is essential for preserving your legacy as a business owner, and it can also prevent conflict among your heirs. To ensure a smooth transition, start the planning process as soon as possible.

“Unfortunately, the importance of succession planning is lost on many companies,” according to Lamey.

Fewer than 10% of companies have a leadership development program, and a quarter of all companies have no succession plan^[9]. 

If you want your business to succeed after you’re gone, consult with an estate planning attorney today to put a succession plan in place.

Kris Lamey, MBA

Written by Leigh Morgan

Leigh Morris has 15 years of experience developing high-converting content for the Web. She enjoys writing about health, law, finance, marketing and careers. Hope has a bachelor's degree in business administration (human resource management) and a master's degree in management and leadership.

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Edited by Katelynne Shepard

Katelynne Shepard is a writer, editor and SME who is proficient at crafting and reviewing content. She has been a full-time copywriter and editor since 2011 and has written content for Fortune 500 companies, independent law firms, indie publishers, small-business owners and mainstream websites. She specializes in parenting, lifestyle, family law, personal injury, criminal law, immigration law, astrology, personal finance, education and health care. In addition to thousands of e-commerce product and category descriptions, Verle's work includes SEO blogs, social media posts and long-form informational articles.

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Subject Matter Expert Kris Lamey

Kris Lamey is a seasoned writer and subject matter expert (SME) in finance, holding a degree in Journalism and an MBA. Alongside her roles in radio and journalism, Kris has enjoyed over 15 years of success in the FinTech industry. She's a Real Estate investor (former broker) who currently freelances as a writer, boasting over 15 years of experience, and she eagerly welcomes new clients and challenging topics. Kris is also actively involved in the health care industry, specializing in mental and behavioral health. She is well-versed in various content formats, including articles, blogs, website marketing copy and press releases.