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Estate Planning Must Include Business Succession Planning
Family businesses are a staple of America, from small home offices to large manufacturing concerns. All family businesses present unique issues for the estate plan. Research shows that only 30% of families successfully pass the business to the next generation. Because running a business is hard work, most business owners find themselves too absorbed in the business to address longer term issues like planning for succession.
When the business owner stops showing up for work, a succession plan can mean continued income for family members and jobs for employees. Some owners want to establish a personal legacy through the continuation of their business. Identifying the owner's goals is the first step in succession planning. With careful planning, the business owner retains control over the outcome.
Often, the business and the business owner die on the same day. Without a succession plan, the value of the business drops rapidly. This means that the owner's family will not receive the full value of the business. Other results may include major disruption or even closing the business; an inexperienced spouse or child trying to run or sell the business; and a lack of cash to pay taxes, salaries and business expenses during the transition.
Several issues and suggested actions will be presented here. If you, as a business owner, cannot imagine completing all of these steps, then complete one or two. It will be a great help to those who administer your estate and run your business after your death or disability.
The benefits of a business succession plan also may be appreciated before your absence. Some lenders want to see this plan in place before approving a business loan. A potential buyer may want to see a succession plan with a seasoned management team in place so they know the business will survive your departure, and they will not have to work 12 hour days to keep it running.
A business succession plan:
* dictates who will manage the business at those times when you are not doing so;
* provides a mechanism to transfer the ownership of the business; and
* provides the cash to pay the outgoing owner.
To decide who will own and/or manage the business after you are gone, consider family and non-family employees, and enlist assistance from a leadership coach or friends who are knowledgeable about you and your business. Make the best decision for now, knowing that it can be changed as necessary. Train your successor. The successor in management may or may not become the new owner. Family members not involved in the business can receive non-voting ownership interests.
An attorney can document the succession plan decisions you have made. A written agreement will cover at least these matters:
* It will provide a price and terms for the transfer of shares, which reduces friction among your estate and the remaining shareholders.
* It will create a market for the owner's business interests by requiring the purchase of shares by other shareholders or the company itself at disability, retirement or death, and it will provide a source of funds - usually insurance proceeds.
* It will facilitate a smooth transition of management and control by identifying those next in command.
Most shareholder agreements do not avoid probate on the ownership interest. A possible solution is to have the owner's living trust own the shares, thus avoiding probate and allowing the successor trustee to vote or sell the shares in case of disability.
Placing a value on the business is part of this process, and an appraisal allows a reasonable valuation formula to be included in the buy/sell part of the agreement. The business valuation process also may give you an idea of when you can retire, considering the lifestyle you wish to lead afterward and the value you wish to receive from the sale of the business.
When should the transfer of the ownership of the business take place? A transfer during your life allows you to keep the voting interest and to make gifts of non-voting stock to family members. A slow sale to employees over time is another possibility, and one of its advantages is to spread the gain on the sale over many years.
Alternatively, if your children inherit the business at your death, they will receive a "stepped up" basis in the asset. This reduces their gain on a future sale. If the business will be sold at your death, you can maximize its sale potential now by organizing files, updating systems and creating manuals. Consider employment agreements for critical managers.
An important step in succession planning is to complete a legal estate plan for your family. This may include wills; trusts; powers of attorney; or other documents. YOUR FAMILY ESTATE PLAN AND YOUR BUSINESS SUCCESSION PLAN WORK TOGETHER.
A business succession plan will not happen overnight. Your accountant or attorney cannot do this for you. It is a process. You can complete one valuable step at a time by setting aside time each month to complete a part of the process.
Note: This column provides general information related to the law designed to help readers understand their own legal needs. This column does not provide legal advice. Please consult a lawyer if you want legal advice. No attorney-client or confidential relationship exists or will be formed between the reader and the author of this column.
Estate Planning Must Include Business Succession Planning
Family businesses are a staple of America, from small home offices to large manufacturing concerns. All family businesses present unique issues for the estate plan. Research shows that only 30% of families successfully pass the business to the next generation. Because running a business is hard work, most business owners find themselves too absorbed in the business to address longer term issues like planning for succession.
When the business owner stops showing up for work, a succession plan can mean continued income for family members and jobs for employees. Some owners want to establish a personal legacy through the continuation of their business. Identifying the owner's goals is the first step in succession planning. With careful planning, the business owner retains control over the outcome.
Often, the business and the business owner die on the same day. Without a succession plan, the value of the business drops rapidly. This means that the owner's family will not receive the full value of the business. Other results may include major disruption or even closing the business; an inexperienced spouse or child trying to run or sell the business; and a lack of cash to pay taxes, salaries and business expenses during the transition.
Several issues and suggested actions will be presented here. If you, as a business owner, cannot imagine completing all of these steps, then complete one or two. It will be a great help to those who administer your estate and run your business after your death or disability.
The benefits of a business succession plan also may be appreciated before your absence. Some lenders want to see this plan in place before approving a business loan. A potential buyer may want to see a succession plan with a seasoned management team in place so they know the business will survive your departure, and they will not have to work 12 hour days to keep it running.
A business succession plan:
* dictates who will manage the business at those times when you are not doing so;
* provides a mechanism to transfer the ownership of the business; and
* provides the cash to pay the outgoing owner.
To decide who will own and/or manage the business after you are gone, consider family and non-family employees, and enlist assistance from a leadership coach or friends who are knowledgeable about you and your business. Make the best decision for now, knowing that it can be changed as necessary. Train your successor. The successor in management may or may not become the new owner. Family members not involved in the business can receive non-voting ownership interests.
An attorney can document the succession plan decisions you have made. A written agreement will cover at least these matters:
* It will provide a price and terms for the transfer of shares, which reduces friction among your estate and the remaining shareholders.
* It will create a market for the owner's business interests by requiring the purchase of shares by other shareholders or the company itself at disability, retirement or death, and it will provide a source of funds - usually insurance proceeds.
* It will facilitate a smooth transition of management and control by identifying those next in command.
Most shareholder agreements do not avoid probate on the ownership interest. A possible solution is to have the owner's living trust own the shares, thus avoiding probate and allowing the successor trustee to vote or sell the shares in case of disability.
Placing a value on the business is part of this process, and an appraisal allows a reasonable valuation formula to be included in the buy/sell part of the agreement. The business valuation process also may give you an idea of when you can retire, considering the lifestyle you wish to lead afterward and the value you wish to receive from the sale of the business.
When should the transfer of the ownership of the business take place? A transfer during your life allows you to keep the voting interest and to make gifts of non-voting stock to family members. A slow sale to employees over time is another possibility, and one of its advantages is to spread the gain on the sale over many years.
Alternatively, if your children inherit the business at your death, they will receive a "stepped up" basis in the asset. This reduces their gain on a future sale. If the business will be sold at your death, you can maximize its sale potential now by organizing files, updating systems and creating manuals. Consider employment agreements for critical managers.
An important step in succession planning is to complete a legal estate plan for your family. This may include wills; trusts; powers of attorney; or other documents. YOUR FAMILY ESTATE PLAN AND YOUR BUSINESS SUCCESSION PLAN WORK TOGETHER.
A business succession plan will not happen overnight. Your accountant or attorney cannot do this for you. It is a process. You can complete one valuable step at a time by setting aside time each month to complete a part of the process.
Note: This column provides general information related to the law designed to help readers understand their own legal needs. This column does not provide legal advice. Please consult a lawyer if you want legal advice. No attorney-client or confidential relationship exists or will be formed between the reader and the author of this column.
