Estate Planning and Family Business
I own a small business, closely held. My son and daughter work in the business – she is the president and he is the vice president of finance. I am proud of them for their interest in the company, and am getting ready to retire and let them handle things – I think. This is my sole source of income in my old age. I don’t want to stay here until I drop dead and they carry me feet first out the door. I need an exit plan that protects my kids and me.
This is always a tough question for anyone who has built a business. It is, after all, your baby and now you need to decide whether to leave the baby to your children or to value the baby, sell it, and pass that on to your kids. But estate planning and family business succession planning go hand in hand with each other.
You need to come to grips with the future and what you think the outcome of the scenario will be in either case. This is a tough question, but a simple one: What would the company be like without you running it? Are your children capable of running it as well as you do? Do they have the necessary commitment? Do they have the same passion (or at least enough passion) as you have regarding its mission?
If they aren't interested in taking over your business, then the decision is an easy one. There are many options on this website for trusts and other investment vehicles that will allow you to pass the value of your years of hard work on to them. You will want to consult with a financial planning advisor familiar with family businesses. However, if the opposite is true and they do want to run the business then you have some tough questions to answer.
If your children want the company…
Step One: Timeline
If your kids want the company, and you believe they can manage it successfully without you, then a time-line needs to be established. This will help you determine how to transfer ownership. You need to decide how much longer you want to manage your business. It is important to consider if your children will be ready, willing, and able to take over at that point. Do you need a transition period where you gradually let go of the reins, or have they had sufficient experience and time in the business to take over immediately? Once you have answered these questions, you can move on to step two.
Step Two: The "what if" phase
Okay, what if they can't get along? What if I want to take off but they're not ready – do I need an interim manager? What if I don't like what their doing with the company? This is the time to think of all the "bad" things that could happen and come up with an acceptable scenario for each. If multiple family members will be involved, you need to anticipate family conflict and plan for how it will be dealt with. There will be inevitable disagreements about who does what and how much each gets paid, etc. Family disagreement is one of the top reasons that family businesses sometimes don’t survive when passed to the next generation. So, think about it now – before the time comes.
Step Three: The structure
Your financial advisor can present the pros and cons of various arrangements. For example, a limited partnership may fit your plans. This could allow you to give shares with a discounted tax value to your children. An annuity trust may be the answer. You may decide selling the stock to a trust with you as note holder is in your best interest.
Tax planning, estate planning and financial planning all play crucial roles as the decisions must be interwoven properly if this rite of passage is to work to everyone’s benefit. In addition to providing financial security for you, it is important to consider a plan to allow business income to flow to your spouse or other beneficiaries in the event of your death. This is a key to good family business strategic planning.
If you want the value of the company (not the company itself) to pass to your children…
If you believe the company is better off if your children do not run it, then allowing them to benefit from the assets in your business is a good choice. You need to maximize the company's value to make it as attractive as possible to a potential buyer. If (in order to receive a higher price) you are planning to be paid out of future income generated by the company, then you want to be certain your company continues to prosper after you have left.
Who to sell it to…
Do you have a key employee who has contributed to your success and knows the business well? Would losing them to the competition hurt your company in the long run? This may be the right buyer – a qualified insider rather than a third party. Is your business seasonal and does that influence when you sell? Would upgrading equipment or your environment enhance the value of your company?
Once you have taken a hard look at the questions, you are ready for an outside appraisal of your business. This appraisal is a starting point for negotiating the sale of your business. You may want to hire a family business consultant or business broker to sell your business. Normally, business brokers, like real estate brokers charge no fee up front; rather they take a percentage of the sale for their fee. Of course everything is negotiable.
Once you have a buyer and have agreed upon a price, you can decide how best to meet your short and long terms goals:
- How can I best accomplish my goals to provide for my needs, my children's future, or to a charity?
- What kind of assistance do I need so that this money is properly invested?
It takes time, effort and some soul searching to decide what to do with your business. Family business succession planning requires tough decisions. But, with the right planning and foresight, your family business can help you meet your estate planning goals and pass on a legacy to future generations.
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