Succession planning using retirement plans
Owner-employees may benefit from deferred payment arrangements
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While in most cases a business offers retirement plans to benefit employees directly, retirement plans can serve another purpose in the context of succession planning. Because a retirement plan creates a vehicle to which the company can transfer assets (most commonly cash) that then become assets of the plan and its beneficiaries (i.e., the employees) rather than the company, the overall value inside the company is reduced. By reducing business value, retirement plans may help alleviate the issue of finding potential buyers that can afford to purchase a successful closely held business.
When the owners provide services to the company and are beneficiaries of the retirement plans, they are able to facilitate the sale, while still receiving the assets that were set aside. Different types of plans exist, and the best option will depend on a given business’ ownership and employees. This article explores those differences and explains how each plan might aid an overall succession plan.