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Creating a Business Succession Plan

Last year, Schwab Financial Consultant David Bubb and Branch Manager Dan Stein, both based in Bethesda, Maryland, received a call from a man in his late 60s who was preparing to sell his general-contracting business and wanted help managing the proceeds.

However, as David and Dan reviewed the man’s finances, they found he’d significantly overestimated the worth of his business—in part because he hadn’t properly prepared for selling it (by bringing in a partner to ensure continued growth even as he himself cut back on work, for example).

“It’s never too early for small-business owners to start thinking about retirement,” Dan says, “especially those who need to plan for the disposition of what is probably their biggest asset.” By planning ahead, owners can be much better positioned to maximize the value of the business for themselves and their families.

Planning for succession

Small-business owners face a formidable decision as they near retirement: pass the business on to family, sell it to employees or a third party, or shutter it and liquidate the assets.

Even if they plan to work until the day they die, owners should still develop a succession strategy, says Tanya Simpson, a Schwab wealth strategist and tax, trust and estate specialist based in Phoenix. “Many small-business owners assume their children will step in, but the interest and ability aren’t always there,” she says.

Tanya suggests that clients consider the following:

  • Who: Assuming it isn’t liquidated, will the business be passed down to family, or sold to employees or an outside party?
  • What: If sold, will the sale include only existing contracts and goodwill or also assets such as equipment, intellectual property and real estate?
  • When: Are there pressing financial or health reasons for selling now, or can you wait for the right situation?
  • Where: Is the business tied to a particular location or can the new owner operate it elsewhere?
  • Why: Are you no longer able or willing to run the business, or is it being transferred for financial reasons, such as for income or estate-planning purposes?

Transferring the business

With these five questions answered, business owners can start to think about another important question: how? “The legal process of transferring a business is a critical aspect of any plan,” says Tanya, who notes that family businesses are typically transferred in one of four ways:

  1. Gifting to family: If you want to keep the business in the family, gifting allows the transfer of assets over time with a focus on minimizing estate and gift taxes. A family limited partnership and/or an irrevocable trust can provide a discount on the value of the business and can remove future growth from the owners’ taxable estate; it may also allow the owners to retain control during their lifetimes.
  2. Selling to family: When gifting the business isn’t desirable or feasible—often for income or tax reasons—selling to family members is another common practice. If family members don’t have the resources to buy the business, owners can instead accept a self-canceling installment note (SCIN), which allows them to derive income from the business during their lifetimes, while removing the value of the business from their taxable estates. The note cancels upon the owner’s death, freeing the buyer from any future obligations. That said, “SCINs are only one of the many non-gift-transfer methods available,” Tanya says. “Owners should work with a qualified attorney to identify the strategy that best serves their needs.”
  3. Selling to a third party: If there’s a strong market for the business and it’s relatively easy to value, this can be an attractive option. Owners should work with an experienced attorney and business broker to structure the deal.
  4. Selling to employees: “Employees often don’t have the capital to purchase a business outright,” Tanya says, “in which case owners may choose to transfer ownership to employees over time.” In a secured-installment sale, for instance, the owner accepts an installment note that can be backed by assets of the business and/or by employees’ personal assets (typically their homes). While this approach may allow employees to buy the company without raising outside capital, it offers minimal up-front cash to the seller and carries a significant risk of default. “Owners become lenders, so they need to make sure the loan is sufficiently secured,” Tanya says.

No matter who the buyer is, the transfer terms should be documented with a buy-sell agreement or other contract drafted by an experienced attorney and formally executed by all parties so there’s no question about each party’s rights and obligations.

Avoiding conflicts

Regardless of how the business is sold or transferred, owners should consider the effect on family members, especially if not all heirs are participating in the company or profiting equally from its sale. “By working through these questions well in advance,” Tanya says, “business owners can develop a smoother succession plan that can benefit the company, its employees and family members.”

What you can do next

  • Call 800-355-2162 to talk with a Schwab investment professional about how business succession planning fits into your financial picture.
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Important Disclosures

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal or investment-planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Schwab wealth strategists and financial planners are employees of Schwab Private Client Investment Advisory, Inc., a registered investment advisor and an affiliate of Charles Schwab & Co., Inc.


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