Sooner or later, everyone thinks about retirement.
For those who own a closely-held or family convenience store or business, retirement is more than just a matter of deciding not to go to work anymore. In addition to ensuring there will be enough money to retire, convenience store owners must decide what will happen to the business when they are no longer in control.
At its most basic, a succession plan is a documented road map to be followed in the event of the owner, partner or shareholder’s death, disability or retirement. An effectively developed succession plan can involve selling the business to provide a retirement nest egg, or continuation of the convenience store business, with gradual changes in management and/or control, to ensure a source of retirement income or any combination thereof.
Although important, taxes should not be the primary factor in succession planning. In fact, the dreaded estate tax applies only after the estate’s value and gifts exceed an inflation adjusted $11.4 million per individual, with a $21.8 million exemption.
Of course, there are always tax issues to consider.
Take those family limited partnerships (FLPs), for example. Using a controversial FLP allows gifting shares of the convenience store operation to family members while generating lower tax bills for both the business and the owner.
First, a partnership with both general and limited partnership interests is created. Then, the business is transferred to this partnership. A general partnership interest is retained for the owner, allowing a continuation of control over the day-to-day operation of the business. Over time, the limited partnership interest is gifted to family members.
Another strategy, the Employee Stock Ownership Plan (ESOP), allows the owner of an incorporated c-store business to sell his or her stock to the ESOP and defer the capital gains tax. Ownership can be transferred to the operation’s employees over time, with an income tax deduction for the business’s contributions to the plan.
An ESOP provides a market for the shares of owners who leave the business, a strategy for rewarding and motivating employees, as well as benefitting from available borrowing incentives and acquiring new assets using pretax dollars.
To keep the income rolling in without having to show up for work every day, succession planning might involve the outright sale of the owner’s interest in the c-store business. When the business interest is sold, the seller receives cash (or assets that can be converted to cash) that can be used to maintain the seller’s lifestyle or pay his or her estate taxes.
Developing a succession plan is a multi-phase process outlining in detail the, who, what, when, why and how changes in ownership and management of the c-store business are to be executed.
Obviously, business owners seeking a smooth and equitable transition of their interests should seek competent, experienced advisers to assist them in this matter. No matter how talented and earnest those professional advisers are, their limited specialties should never dictate the choices for the business or the owner, shareholder or partner’s family.
A lawyer can make compelling arguments for many strategies. A CPA can be very convincing when suggesting strategies for controlling income taxes. And it is a similar story with financial planners and insurance professionals.
Finally, succession planning isn’t something that can done once and forgotten. To be complete and effective, a succession plan must be continually revisited, reviewed and updated to reflect changes in the value of the convenience store operation, market conditions and the owner, shareholder or partner’s health, as well as the abilities and passion of the people it will be passed on to.