Estate Planning and Family Business

I own a small, closely held business. My son and daughter work in the business – she is the president and he is the vice president of finance. I am proud of 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 they carry me out the door feet first. 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 the proceeds on to your kids. But estate planning and family business succession planning go hand in hand.

You need to come to grips with the future and what you think the outcome will be in either case. This is a tough, but simple, question: What would the company be like without you running it? Are your children capable of running it as well as you? Do they have the necessary commitment? Do they have the same passion 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 your kids. 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 you must establish a timeline. 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 whether 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 it together? 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 they’re doing with the company? This is the time to think of all the "bad" things that could happen and come up with acceptable solutions. If multiple family members will be involved, you need to anticipate family conflict and plan for resolution. 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 it gets to that point.

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 also be the answer. Alternatively, 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 these decisions must be properly integrated 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 without your children running 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 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 him 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? 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 its sale. You may want to hire a family business consultant or business broker to sell your business. Normally, business brokers, like real estate brokers, charge up front fee; rather, they take a percentage of the sale for their fee.

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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--by Beth Heikkinen
Marquette, Michigan
I just want to thank you for this site. It answered my questions. I think many people that do research on the net take it for granted and when they find what they are looking for they forget "someone put time, money, etc into providing me with this information."

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