In the business world, there are all kinds of people: young entrepreneurs, heads of households, older adults, and whole families, among others. For many, their lives revolve around their business—but they will have to step down at some point. Have you ever wondered what would happen to your business in your absence?

If you do not have an answer, it is crucial for you to have a financial plan that defines your company’s succession plan.

Financial planning seeks to define topics such as: family budget, risk management, tax and expense planning, investments, estate, and business succession, among other matters.

A succession plan provides a guide to transfer the company in an organized manner, considering the owner’s objectives, tax aspects, and the tools needed during the process, without impacting the business’s operation or value. “It’s all about achieving an effective succession. That in the event of a retirement or if there are other partners or family involved in the business, a successful transition can be made, allowing the company to prevail,” said Rafael Arthur Torres, Senior Private Banker at Popular One.

Every entrepreneur must understand that, as with other aspects in life, foreseeable or unforeseen situations can affect the company, such as retirement, sale, death, disability, divorce, or bankruptcy. The best way to avoid detrimental effects to the business is through financial planning.

Given the likelihood of any of these events, let us explain how you can develop a succession plan for your business.

Tailor-made plans

Arthur Torres explained that each business has its own context and particular circumstances, which is why financial plans are “tailor-made.”

The company is usually the main source of the family’s income. Planning tends to be a little easier if there is a single owner. But what if there are other partners or shareholders? What happens when family members work at the company? What if one of the children works at the company, but their siblings do not? Are there any key employees? How much is the business or your share in it worth?

One must begin by addressing the last question: How much is the business or your share worth? Much of the planning process will depend on this, Arthur Torres added.

When there are partners or shareholders, there should be an agreement with full details on how situations or events will be handled. Although the value may change according to market circumstances, the agreement sets forth the methodology that will be used to calculate it. For example, it could be agreed that an average from the past five years audited financial statements will be used or that the services of a company specializing in business valuation will be engaged.

On the other hand, the situation can be more complicated if there are family members who worked at the company, admitted the expert. There are cases in which some or all the children work at the company (there may be age differences, children from another marriage, or a lack of interest from some or all.)

“If all the children are not there or if roles within the company are not defined, expectations may differ. Therefore, the ideal scenario is that things are clearly determined from the start,” said the banker. It is suggested that the personal estate plan be consistent with the succession plan since, according to Arthur Torres, “they are mutually related.”

Reorganizing the corporate structure is another family business strategy. This way, the owner can decide who receives the shares and manages the company, and who receives benefits without working at the company, so they do not have decision-making power.

When there is a key employee in the company, Arthur Torres pointed out that a corporate restructuring may be a strategy to transfer participation to this person. When you want to pass control to an employee outside the family circle, it can be done by transferring the majority of shares to them.

>Planning is ongoing

Arthur Torres recommended planning the business’s succession from the beginning, especially when partners or family members are involved.

Every company requires a constant evaluation that allows the owner to prevent risks. Not planning for the future of a company could have dire effects. For example, there may be situations with tax implications or risks that are not being properly managed, which may lead to a business closure.

There are several ways to transfer business ownership, and each must be viewed in the context of the implications involved for the transferor and the recipient. Some implications that must be evaluated include asset protection, tax considerations, and impact on the estate. Similarly, the tool selected to finance the strategy is key.

Arthur Torres mentioned that one strategy could be opting for a limited liability company (LLC) instead of a regular corporation. With this strategy, profits could go directly to the LLC members’ personal tax returns. He added that, in the event of a death, this method allows for business continuity and could reduce the impact of estate taxes in situations where the assets outside of Puerto Rico are managed within the LLC.

Arthur Torres also pointed out that upon a transfer of ownership, the person can choose to restructure the company’s capital. “There may be a capital restructuring where you can have common stock, preferred, or non-voting stock. It’s a scenario where there will be ownership, they will benefit from the corporation’s future profit distributions, but control over the business will be limited.”

"We plan for the worst-case scenario, although in reality, we reach a point in between,” Arthur Torres affirmed.

There is no doubt that business planning is a complex matter as it requires introspection, time, and organization. The most important thing is to get started if you haven’t already. If you started planning, we encourage you to continue. If you feel it’s been a long time since you last reviewed your business plan, make sure it meets your needs and includes any changes in your circumstances or applicable laws.

At Popular One, our team of professionals is ready to assist you in this process, as well as in handling your finances, investments, or insurance needs. We encourage you to call your Private Banker or contact us at 787-281-7272