## Business succession planning in Arkansas **Business succession** is the planning for transferring ownership + management of a closely-held business to next generation, partners, or third parties. Arkansas family-business owners face significant risks without proper planning — only ~30% survive to second generation, ~12% to third. ## The basic challenge **Without planning:** - Estate tax can force sale - Family disputes over control - Lack of trained successor - Customer / employee defection - Bank concerns + credit issues - Insurance coverage gaps - Operational disruption - Lower business value - Uncertain transition **With planning:** - Smooth transition - Tax efficiency - Liquidity available - Trained successors ready - Customer / employee continuity - Maximum business value - Family harmony - Legacy preserved ## Buy-sell agreements **The cornerstone document:** **Purpose:** - Restricts transfers of ownership - Specifies buyout terms - Provides for triggering events - Funds purchase **Triggering events:** - **Death** of owner - **Disability** (long-term) - **Retirement** - **Divorce** (sometimes) - **Bankruptcy / financial distress** - **Voluntary withdrawal** - **Termination of employment** - **Outside offer** **Types:** **Cross-purchase:** - Other owners buy departing owner's interest - Each owner buys insurance on others - Step-up in basis for survivors - Multiple insurance policies needed - Better for fewer owners **Entity redemption:** - Company buys departing owner's interest - Company owns insurance on owners - Lower basis for survivors - Single insurance policy - Better for more owners **Hybrid:** - Combines both - Flexibility - More complex **Wait-and-see:** - Decision made at triggering event - Maximum flexibility - Less predictable - Less common ## Valuation provisions **Critical for buy-sell:** **Common methods:** **Formula:** - Pre-set calculation - Multiple of earnings - Book value plus adjustments - Specific industry formulas **Appraisal:** - Independent appraiser - Specific procedures - Time delays - More accurate **Agreed value:** - Annual valuation - Updated regularly - Most accurate if maintained **Combination:** - Formula with appraisal backup - Floor + ceiling - Most flexible ## Funding the buyout **Options:** **Life insurance (most common):** - Tax-free death benefit - Funds buyout immediately - Specific structures (cross-purchase or entity) - Term vs permanent considerations - Costs increase with age - Inadequate for retirement scenarios **Disability insurance:** - Often overlooked - Covers long-term disability buyout - Lump-sum benefit - Specific buy-sell rider **Sinking fund:** - Set aside funds over time - Tax considerations - Inflation issues **Installment sale:** - Pay over time - Tax considerations - Risk to seller **Borrowed funds:** - Bank financing - Coverage based on company value - Personal guarantees often **Combination:** - Multiple sources - Most realistic for many businesses ## Key-person insurance **Beyond owner buyouts:** - Insurance on key employees - Death / disability coverage - Funds finding replacement - Covers transition costs - Customer retention efforts - Bank notice requirements ## Family business succession **Transferring to next generation:** **Challenges:** - Multiple children - Some active in business, some not - Equality vs equity - Compensation issues - Spousal involvement - In-law relationships - Family dynamics **Common structures:** **Bequest in will / trust:** - Transfer at death - Avoid current gift tax - Step-up in basis - Loss of grantor's control - Estate tax issues **Lifetime gifts:** - Annual exclusion gifts - Lifetime exemption - Loss of control - Carry over basis - Removes appreciation from estate **Sale to family:** - Promissory note - IRS scrutiny - Tax implications - Adequate consideration required **GRATs (Grantor Retained Annuity Trusts):** - Transfer appreciation to next generation - Discounted gift value - Specific structures - Death-during-term risk **Family LLC / FLP:** - Centralized management - Discounted valuation for transfers - Restricted transfers - Family control + ownership separation **Voting / non-voting structures:** - Pass economic benefit without control - Voting interests stay with active - Non-voting interests to passive family ## Transferring management **Different from ownership:** - Day-to-day management transition - Trained successor - Mentorship period - Employee acceptance - Customer relationships - Vendor relationships - Bank relationships **Phases:** 1. Identify successor (5+ years before) 2. Train + develop 3. Gradual responsibility transfer 4. Equity participation 5. Outside CEO (sometimes) 6. Full transition ## Outside sale options **When family doesn't continue:** **Options:** **Strategic buyer:** - Industry competitor - Higher valuations typically - Cultural transition - Sometimes employee impact **Financial buyer:** - Private equity - ESOP (employee stock ownership) - Specific structures **Employee buyout:** - ESOP - Management buyout (MBO) - Specific tax benefits - Employee retention - Often financed **Recapitalization:** - Take some chips off table - Continue operating - Outside investment - Phased transition ## Tax planning **Estate tax:** - Federal $13.99M exemption (2025) - ${s.name} state estate tax (sometimes) - Family business interests valued at FMV - Discounts for minority + marketability - 6166 installment plan for estate tax - Specific business deductions **Section 6166:** - 14-year payment plan for estate tax - For closely-held businesses - Specific eligibility - 2% interest - Significant relief **Section 303 redemption:** - Stock redemption to pay estate tax - Capital gains treatment - Specific eligibility - Family business preservation **Specific tax provisions:** - Section 1202 (QSBS exclusion) - Section 1374 (S-corp built-in gains) - Specific industry provisions - ${s.name} state-specific rules ## Specific entity considerations **LLC vs corporation:** - LLCs: pass-through, flexible - S-corps: tax efficiency, restrictions - C-corps: built-in gains - Different succession dynamics **Operating agreement provisions:** - Buy-sell terms - Voting rules - Management succession - Capital contribution requirements - Distributions + tax ## Common mistakes - **Doing nothing** (most common) - **Outdated documents** (changes haven't been reflected) - **Inadequate insurance** (premiums lapsed) - **Wrong valuation method** - **Forgetting disability** - **Inadequate funding** - **No trained successor** - **Family conflict not addressed** - **Tax inefficiency** - **Inadequate liquidity for estate tax** - **Buy-sell + estate plan not coordinated** ## When to start **Earlier is better:** - 5-10+ years for major transitions - Buy-sell at formation - Updates as business grows - Reviews every 3-5 years - Major life events trigger reviews ## Cost considerations **Comprehensive succession planning:** - Initial planning: $5,000-$25,000 - Annual maintenance: $1,000-$5,000 - Insurance premiums: variable - Worth it for businesses $1M+ **Comparison:** - Family disputes can cost millions - Forced sales below market - Failed transitions devastate - Investment pays off many times over ## What you should do If you own a business in Arkansas: start succession planning NOW — it takes years to do right. Coordinate with: estate-planning attorney, business attorney, CPA, financial advisor, insurance specialist. Most Arkansas estate / business attorneys handle succession. Annual reviews recommended. Multi-generational businesses need most attention. --- *This guide is general information about federal + Arkansas law as of mid-2026 and is not legal advice. Business succession is complex + technical. Talk to a licensed Arkansas estate-planning + business attorney about your specific situation.*