Who takes over your business, and when should you start planning?

Succession planning for business owners means deciding who will own and run the company after you, how they will pay you, and when control passes. The usual successors are a family member, a manager, a partner, your employees through an employee stock ownership plan (ESOP), or an outside buyer. Start years ahead, because a successor takes time to prepare.

A child asks whether they should plan on running the company, your best manager asks what it would take to buy in, or a health scare makes you wonder who would sign payroll next month. Each is the same question with two halves: who will own the business, and who will run it. They are often different people.

What does succession planning for business owners cover?

It covers four decisions: who owns the business next, who runs it, how and when you are paid, and what happens if you cannot work before the handover. A business succession plan is the written version, with dates, a price or a method for setting one, and the terms of payment.

Exit planning is the wider work of deciding when you leave, what you need from the business, and which exit you take. Succession is the part that names the person, and even an outside buyer will ask who runs the company after you.

Who can take over your business?

Five kinds of successor cover most cases, and the biggest difference between them is how you get paid.

A management buyout is a sale of the company to the people who already run it. An ESOP is a qualified retirement plan that must be designed to invest primarily in the employer's own stock, according to the IRS, and federal tax law requires an independent appraiser to value the private-company shares it holds. If you own an advisory firm, when is the right time to sell your RIA covers the extra steps.

How do you choose between family, a manager, and a buyer?

Start from what you need, then test each candidate against three questions.

1. Can they run it? Look at what they have run without you, and with what results.
2. Can they pay? When an insider does not have the price in cash, the money usually comes from a loan the business repays or from a note you hold.
3. Will they say yes? Ask before you plan around anyone, early enough that a no still leaves you other paths.

Ownership and management can be split, with a family member owning the shares and a hired manager running the company. When no one in the family wants to own or run the business, a family plan does not fit, and the choice is among a manager, a partner, your employees, and a buyer.

What numbers do you need before you choose?

You need four: a value range, the amount you need after tax, what the business earns once your job is paid at market rates, and what each successor can afford.

For a gift of shares, the IRS uses fair market value, the price at which property "would change hands between a willing buyer and a willing seller," both with reasonable knowledge of the relevant facts (Treasury Regulation 25.2512-1). A range built the same way shows what you give up when you set an insider's price below it, and how to increase business value before an exit covers what moves it.

Your own number is what you need after tax, and by when. Payments spread over ten years are worth less to you than the same total at closing, and they depend on how the business does without you.

Earnings without you are the ones a successor inherits, so replace your own pay with what it would cost to hire someone to do your job. The figures below are an illustration.

In this example the successor inherits $90,000 a year less than you see. A buyer restates earnings this way, so do it first.

What a successor can afford usually comes from the business's future cash flow. SBA 7(a) loans of up to $5 million can fund complete or partial changes of ownership, according to the U.S. Small Business Administration, and how to finance a business acquisition covers what a lender will ask of your successor. If you are paid over time, the IRS's installment method generally lets you report the gain as the payments arrive, although gain from depreciation recapture is reported in the year of the sale and inventory does not qualify.

What happens if you cannot work before the handover?

Your buy-sell agreement and a short contingency plan decide it. A buy-sell agreement is a contract among the owners, and sometimes the company, that says who may or must buy an owner's shares, and at what price or by what formula, when an owner dies, leaves, or wants out.

How the agreement is funded matters. In Connelly v. United States (June 6, 2024), two brothers' company held $3.5 million of life insurance on each of them to buy back a brother's shares at his death. The Supreme Court held that the company's obligation to redeem the shares did not offset the insurance proceeds in valuing the company for estate tax, which cost the estate $889,914 in additional tax. The Court noted that a cross-purchase agreement, in which the owners buy each other's shares, would have avoided the risk that the insurance proceeds raised the value of the shares, with drawbacks of its own.

Check your own agreement for the price or formula, how the buyout is funded, and when the price was last updated. Then write one page for the first 90 days without you: who can sign payroll and pay bills, who speaks to the bank and the largest customers, and where the agreements and insurance policies are kept.

How far ahead should you start?

Count back from the day you want to stop running the business, because the slow parts are preparing a successor and building a record of results without you. A sale takes months once it starts, as the risk of waiting one more year shows.

1. Decide the path, and ask the people it depends on.
2. Get the four numbers above.
3. Hand over authority one function at a time, and let the successor's results show over full years.
4. Transfer ownership in one step or in stages. For family gifts in 2026, the annual exclusion is $19,000 per recipient and the basic exclusion amount for estate and gift tax is $15 million under Public Law 119-21, according to the IRS.
5. Step back, with a defined role for a set period, so customers and staff see the new owner decide.

No number of years fits every company. If you want out in five years and have no successor in mind, start with the numbers now, because they show which paths are still open. Exit optionality covers the groundwork that helps every path.

What to do next

1. Write two dates: when you want to stop running the business and when you want to stop owning it.
2. List the realistic successors, and talk to each one before you plan around them.
3. Get a value range, and restate your earnings with your job paid at market rate.
4. Read your buy-sell agreement for the price, the funding, and the date of the last price update, or note that you have none.
5. Write the one-page plan for the first 90 days without you.

We set out the valuation range, restate your earnings the way a buyer or a lender would, and model how each successor could pay you and over what period, so you can compare the paths with numbers. That is part of our succession planning and M&A advisory work.

Questions owners ask

How does a sale to an ESOP work for taxes?

Under tax code section 1042, a C corporation owner can defer the gain on shares sold to an ESOP by reinvesting in qualified replacement property between three months before and 12 months after the sale. Among other conditions, the plan must own at least 30% of the stock right after the sale, and the owner must have held the shares three years. S corporation shares sold after 2027 can use the election on up to 10% of the amount realized.

Is it too late if you want to step back next year?

A year leaves time to get the numbers and start a sale, and little time to prepare a successor who has never run the business. Choose among the paths a year allows, such as a partner already in the business or an outside buyer, and keep handing work to your managers so the company depends on you less while it changes hands.