Business Succession Planning

Engage a credentialed appraiser (ABV, ASA, or CVA) to produce a Rev. Rul. 59-60 conforming valuation. The owner's gut number is almost always wrong, and an outside opinion is required for any gift or estate filing the IRS will not contest. Attach the signed engagement letter when received.

Pull the operating agreement, stock ledger, and any prior buy-sell. Confirm S-election (Form 2553) status, capital accounts, and outstanding member loans. Mismatches between the cap table and the K-1s are the single most common surprise at this stage.

Export reviewed or compiled financials for the past three fiscal years plus YTD trial balance from QBO or Sage Intacct. Normalize for owner compensation, related-party rent, and one-time items so the appraiser is working from EBITDA, not raw book earnings.

Run a customer concentration analysis — anything over 10% from a single client materially affects valuation multiples. Flag relationships that live entirely in the owner's head; those translate into earn-out clauses or holdback escrow.

Decide the transition path before evaluating people — the legal, tax, and financing structures diverge sharply. A family transfer is often a gifting program with grantor trusts; a management buyout is typically an installment sale; an external sale runs through a broker; an ESOP requires a feasibility study and trustee. Pick the path that drives subsequent steps.

Score on operational readiness, financial capacity to fund the buyout, client relationships, and willingness. Document the assessment so you can defend the selection later — disgruntled non-selected family or partners are a common source of post-transition litigation.

Have the owner meet each finalist under NDA. Surface deal-breakers early — financing capacity, willingness to relocate, willingness to sign a personal guaranty on the SBA loan. Half of MBOs collapse here when the buyer can't get past the personal-guaranty conversation.

Coordinate with outside counsel on triggering events (death, disability, divorce, departure), valuation method, and funding mechanism. A buy-sell with a stale fixed price from 2014 is worse than no buy-sell at all — IRS will challenge the value at death under Section 2703.

Project lifetime exemption usage against the appraised value, factoring in valuation discounts for lack of control and marketability (typically 25-40% combined). Consider a GRAT or IDGT sale to freeze value if the owner is healthy and the business is appreciating. Coordinate with the estate attorney before any transfer hits.

Run scenarios: straight installment note under §453, SCIN with a premium, or seller-financed promissory note. Set the AFR-compliant interest rate published the month of closing — under-market rates trigger imputed interest under §7872. Model the owner's cash flow against retirement needs.

Engage an ESOP advisor and independent trustee. The study confirms whether the company has sufficient repurchase obligation capacity, payroll headcount, and recurring earnings to support a leveraged ESOP. Most companies under $5M EBITDA fail this test on the repurchase obligation alone.

Update the operating agreement or shareholder agreement to reflect the new ownership structure, drag-along/tag-along rights, and right of first refusal. For S-corps, confirm no transfer threatens the S-election (no more than 100 shareholders, no ineligible holders).

Build a relationship map in the CRM (Karbon, Canopy, or HubSpot) covering decision-makers, fee history, scope, and renewal cadence. The owner has 30 years of context that lives nowhere except their head — get it written down before training, not after.

Spell out signing authority by dollar threshold, hiring authority, client engagement-letter authority, and CapEx approval. Ambiguity here is the source of half of post-transition founder-vs-successor conflicts.

Sequence the milestones: client introductions in months 1-3, lead on engagements in months 4-6, full P&L responsibility in months 7-9, owner steps back in months 10-12. Hard checkpoints with defined go/no-go criteria — not soft handoffs.

Update bank signature cards, IRS Form 2848 (POA), state tax POAs, payroll provider admin (Gusto/ADP/Rippling), and the QBO admin user. Don't remove the owner until after closing — keep dual authority during the wind-down period.

Sign the purchase agreement, promissory note, security agreement, employment/consulting agreement for the seller, and any non-compete. Update the stock ledger or membership ledger the same day.

Send the announcement letter co-signed by owner and successor. Confirm any change-of-control covenants in the credit facility — most SBA and bank loans require lender consent before close, not after. Vendor contracts often have assignment clauses that need explicit written approval.

File Form 8822-B within 60 days of the responsible-party change. Update the Secretary of State annual report, sales-tax permits, and any state professional licenses. Missing these is how IRS notices end up at the prior owner's home address two years later.

Update plan sponsor signatory on the 401(k), confirm fiduciary insurance still names the right responsible party, and reissue health-plan signatory paperwork. If the entity converts (asset sale vs stock sale), a new EIN may force a short-year 5500 filing.

Reverify life and disability policies on the successor match the new buy-sell mechanic. Cross-purchase versus entity-purchase decisions made at closing have tax implications for surviving owners' basis — confirm with the tax partner annually.

Compare actual results against the milestones set in the training plan. Specifically check: client retention rate, revenue versus pro-forma, key-employee retention, and the seller's actual time involvement versus the consulting agreement.

Document the year's changes in board minutes — share transfers, valuation refresh, buy-sell amendments. The annual minute-book update is what defends the entity structure under IRS or state audit.

Engage an executive coach, extend the seller's consulting agreement, or trigger the buy-back provision in the buy-sell. Define hard 60- and 120-day checkpoints — drift here is how transitions unwind 18 months in.