Top 10 Steps of Succession Planning for a Privately Held Business

By Mike Gillis, CPA, Davenport, Marvin, Joyce & Co. LLP, Greensboro, N.C.

Editor: Michael D. Koppel, CPA/CITP/PFS, MSA, MBA

Personal Financial Planning

Succession planning for the privately held business results in an orderly transfer of the ownership and management of the business to the next generation in a tax-efficient manner. The steps are:

1. Personal financial plan: The process should start with a personal financial plan for the business owner that guides the remainder of the process. Does the owner need additional retirement income from the business? Is the owner in a financial position to gift ownership to family members without any consideration? The plan should project the business owner’s retirement income needs and compare them with income available from other sources. This will allow the financial adviser to assess how much income the business owner still needs or desires from the business.

2. Family plan: A family plan will then assess the future roles of family members, whether active in the business or not, and assure fair compensation and inheritance.

3. Business strategic plan: A strategic business plan beyond the owner’s retirement will assess the economic outlook of the industry and look at financial trends. Will the business still be growing?

4. Corporate governance: Establishing a more formal corporate governance structure for the entity is an important part of the succession plan. This will include a “real” board of directors and establishing corporate officer accountability and a compensation structure that rewards achievement.

5. Tax and legal entity: Is the business operating out of the right entity, such as a C corporation, an S corporation, or limited liability company? Is the real estate ownership separated from the operating entity? The choice of entity can be critical to the options available for the ownership transfer and the future tax burdens.

6. Operating agreement: Make sure the corporate attorney is involved in drafting the business’s operating agreement and the shareholders’ buy-sell agreement before any ownership transfers are made. This is very important to restrict the future transfer of ownership and assure how an owner’s equity is handled upon the owner’s death, disability, retirement, or other separation from service.

7. Transfer-of-ownership tools: Consider all the tools for the tax-efficient transfer of ownership, including stock gifts, stock sales, self-canceling installment notes, grantor retained annuity trusts, redemptions, employee stock ownership plans, charitable remainder unitrusts, family limited partnerships, and intentionally defective grantor trusts.

8. Owner’s estate plan: Working with the estate attorney and updating the estate plan of the business owner should be part of this process. Make sure the estate documents are current and updated properly for the new succession plan.

9. Soft-side issues: Consider getting additional help with the “soft-side” issues. CPAs and financial advisers are very good at handling the business transition from the hard side of financial planning and efficient tax structure. Often, however, additional help is needed on the softer issues such as leadership training and transition, communication, conflict management, and selecting the right people for the next generation of management. Human resources professionals, executive coaches, and leadership trainers can be very important members of this team.

10. Start the process: Start now, be thorough, and make this process a priority. Too often, this process is started so late in a business owner’s career that many of the potential options are off the table. The earlier one starts this process, the better, and if it has not been started yet, begin today and follow through to implementation.


Michael Koppel is with Gray, Gray & Gray LLP in Westwood, Mass.

For additional information about these items, contact Mr. Koppel at 781-407-0300 or .

Unless otherwise noted, contributors are members of or associated with CPAmerica International.

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