Pictured Left to Right (Ryan Stump, Todd Villarrubia, Amanda Paracuellos, William Browning)
Succession planning is key to the future of family-owned businesses.
According to a 2025 survey conducted by Deloitte, nearly half of the 100 small business respondents to its questionnaire said they felt “’well or very well prepared for leadership succession.’”
That means succession planning is no longer an afterthought, but an increasingly important consideration in mapping the future of an entity’s continued success under a new generation of leadership. Regardless of whether a business’s new leaders are family members or trusted associates (or even a third-party buyer), the most important aspects of a succession plan “depend on the dynamics of the business to determine” key considerations of such an arrangement, says Ryan Stump, a North Carolina estate planning attorney.
Planning for the future of a business beyond its current ownership status is of paramount importance to the continued livelihood of the enterprise. Stump says, “Continuity is key to keep customers and clients. Maintaining the flow of business (upon an ownership transfer) helps ensure a smooth transition” from the donor generation to the next.
Since many shed industry businesses are family and/or friend operations, it makes sense to cover this important topic to plan for the future of the enterprise.
WHAT IS SUCCESSION PLANNING?
According to Wealth Planning Law Group Founder Todd Villarrubia, a longtime Louisiana attorney and certified exit planning advisor, “Succession planning is literally a legal document that outlines a succession plan based upon certain triggering events and at a pre-determined value.”
Arrangements outlined in a plan have numerous impacts upon its recipient(s), such as tax implications, depending on whether the transfer was a gift or a sale, for example.
Villarrubia cautions business owners that “preparing for transitions is of paramount importance.”
Without thorough pre-planning for a changeover in ownership outside the sale of the entity to a third party, most businesses fail in the second generation. He notes that upwards of 73 percent of second-generation businesses dissolve when a comprehensive succession plan was not established prior to the hand-off to a second generation, while nearly 90 percent collapse in the third generation without pre-planning.
Main considerations of a succession plan include:
- Determining who will assume control of the business.
- Stating what event triggers the implementation of the succession plan (for example, the retirement or death of the owner(s).
- Deciding whether the business will stay within the family or include outsiders upon the triggering event.
- The value of the business based on industry standards.
THE PROS AND CONS OF SUCCESSION PLANNING
When creating a succession plan, it is imperative for business owners to recognize there are no right or wrong answers, says Amanda Paracuellos, an attorney and namesake of Paracuellos Law Group in Laguna Beach, California. That is because every entrepreneur has their own “goals, desires, needs, etc.” for the future of the entity upon the occurrence of the triggering event for the plan.
She is a strong advocate of succession plans.
Worse than not having a succession plan is having a “bad one,” she cautions.
“I don’t think there is a negative to having the plan, but it must be revisited and updated in a timely manner to reflect current economic, business, and family considerations,” Stump says.
Villarrubia agrees. If business owners do not regularly update their succession plan to reflect current economic conditions, changing business value, the depreciation of or acquisition of assets, and named recipients, the plan is in peril.
“I hate when I see a buy/sell agreement without a purchase price that is appropriate for the industry,” he says.
Deciding what you want to happen to your business once you formally separate from it “gives a sense of peace of mind. The plan is written, hopefully not ambiguous, and thorough,” says Villarrubia.
Another benefit of creating a succession plan is that it is likely a better alternative to what state laws would permit in that particular situation. Succession plans “beat default plans provided by state law, which are not good for business owners,” he says.
“The kindest thing you can do for your family is to have an estate plan, a business succession plan, disability plan, living wills, and durable powers of attorney for finance and healthcare,” he says, also advising business owners to seek advice from a tax attorney who understands the complexities of those intersecting legal documents as well as a board-certified estate planner.
The best way to “protect your legacy is to put it in writing,” says Paracuellos, acknowledging that in the generally close-knit shed industry, many transactions are solidified by a handshake, not necessarily written and signed contracts. Relying on a verbal agreement, whether a deal was closed on a handshake or not, is not a reliable way to conduct business.
“If a dispute arises, you have nothing if it is not in writing,” she cautions.
THE CONNECTIONS BETWEEN ESTATE PLANNING AND SUCCESSION PLANNING
A business owner’s “estate planning should coordinate with their succession plan,” says William Browning, a partner in the estate planning section of the Columbus, Ohio, office of Isaac Wiles. He says this is especially true when an entrepreneur “has one or more children taking over the business and others are not.”
According to Browning, “The key is to value what the kids who work in the business receive” versus what other beneficiaries are to inherit. To avoid ambiguities, Browning advises specifying what each child is to inherit.
“Specificity is the key,” he says.
State laws where a business was incorporated govern certain aspects of succession for that entity, such as the permissibility of certain types of transfer restrictions of the shares of such entity, who is in control, and how management decisions are made.
As Paracuellos notes, a business may be headquartered or operated in locales other than where it was incorporated, so the statutes from the state of incorporation rule such terms. Meanwhile, the laws of the state where a decedent (a deceased person who dies with a viable last will and testament or a trust) has their primary residence control estate planning for that person. To add just a dash of delight to the equation, the Federal Internal Revenue Code also plays an integral role in both succession and estate planning, she says.
Having multiple children as potential beneficiaries of an estate plan demands “clear direction” in both types of planning, she says.
“Nothing kills a business like chaos and fighting when no one is in charge, and the business starts to tank. (Having a written plan) is like having a rule book on how things should operate,” once the triggering event has occurred, says Paracuellos.
Although there are costs associated with the creation of the various planning documents, “the money invested in this advanced planning is well worth it,” she says.
“The succession plan’s content is the most important aspect of the plan,” says Paracuellos.
It is imperative to ensure the business owner’s succession plan and estate plan do not contradict. Say a succession plan indicates the owner’s oldest son is to oversee the family business when the triggering event, the parent/owner’s retirement, occurs. A few years later, that parent dies and their last will and testament awards the structure housing the business to a different child. That situation could raise disagreements if the child now owning the building decides to move their own enterprise there, which, on its face, seems to contradict the succession plan’s intent.
Such a situation leaves the conflicting succession and estate plans open to interpretation. That is a recipe for discord and disaster.
ADVICE FROM THE EXPERTS
Who needs a succession plan?
“Everyone,” agree all four lawyers.
Succession plans are more common when the business owner(s) have a family. According to Paracuellos, “It is your legacy and most business owners want to see it survive and thrive and also provide for the owner’s retirement (if that is an aspect of the plan).”
There are numerous matters to consider when establishing a solid succession plan. For example, cautions Villarrubia, whose law practice focuses on representing white collar, C-suite executives, and small business owners, “beware of the gift tax implications” of simply giving a business, assets, or other consideration to heirs.
Under current IRS rules, a parent may gift each of their children up to $19,000 a year without the offspring owing taxes on the present. That amount is revised often, so it is wise to revisit that topic if it becomes a consideration.
Partly due to IRS regulations, “it is best not to gift directly to kids. It is best to use a trust,” says Villarrubia.
An important benefit of a trust is that it is more difficult for creditors to pierce, or financially invade, assets held in a trust.
In other words, says Villarrubia, “The assets are protected from future creditors.”
He urges business owners to be transparent when establishing a succession plan.
“The more detailed, the better,” he says.
He emphasizes the importance of the plan clearly stating what event triggers its implementation. For example, does it go into effect upon the death of the business owner? Or perhaps when the owner reaches a certain age or even upon a stated date?
A strong succession plan also includes some type of “Russian roulette” clause, says the lawyer. In that scenario, if the business is a multi-owner entity, and “you ever get sideways with a partner, you can buy your partner out for ‘X’ or they may buy you out for that price,” explains Villarrubia.
IN CONCLUSION
Implementing a detailed succession plan, which includes a complementary and wide-reaching estate plan, is pivotal for ensuring a smooth transition of a family-owned business when a stated triggering event occurs.
Paracuellos says it is “important to know your overall goal, including the budget, economics, strategies, and operating procedures” to implement useful and thoughtful plans.
Villarrubia cautions business owners that the more successful a business becomes, the more complicated a transition in ownership becomes.
“As your wealth grows, the complexity increases. Every time revenue doubles in value, your complexity factor goes up by 13,” he sums up.
