Succession planning can be a daunting topic. No one wants to think their days of owning and working at the business they built will come to an end. All too often, the sobering reality of one’s frailty hits and the lack of proper succession planning leads to the loss of a family business.
According to statistics from the United States Small Business Administration, small family-owned businesses make up the vast majority of all companies in the United States. However, only about one-third survive into a second generation. In order to preserve years of labor and toil, succession planning is a necessary component for small business to continue to thrive.
Many small business owners believe the preparation of a basic Last Will and Testament is all that they need. However, this ignores multiple practical considerations that can affect the transition of a family business to the next generation.
The first practical problem is management of the business. Do your children agree on how the business should be run? Is one child more savvy and experienced than another? How do you provide for all of your children while ensuring the right decision-maker is in place? The key is to pick the right person to run the business and provide participating roles to your other children. What if your family does not want the business? Do you sell to a third-party or do you entrust your life-long work to a trusted employee? Proper planning and training can ease tension and smooth the transition into new management.
The second practical problem is the change in ownership. It is common to want to treat children equally and give them equal ownership interests in the family business. However, often times only one of them actively engages in the day-to-day operations of the business. If none of the children want the business, and a proper plan is not made to sell, it can be sold at a fraction of its value during the administration of your Estate. Another option is to bequeath money to the in-active child(ren) and the business to the active child(ren).
The third practical issue is the structure of your succession planning. Depending on the value of your business, there are a number of different methodologies to transfer ownership of the business. One option is to use the annual gift exclusion to gift shares of stock and transfer the remainder through your will. The risk here is that once you gift the majority of stock, you have lost control over the ownership of your business. If you sell the business, whether to certain family members or a third-party, how do you structure it? Some options include using a life insurance policy for funds to purchase the business, entering into a buy-sell agreement with financing, as well as a variety of other methods or combination of many different structures.
Finally, as with all estate and succession planning, estate taxes must be considered during the planning process. Otherwise, they can become a financial burden to your family members. With proper planning, the value of your business can be preserved and maximized to the greatest extent possible. The last thing any parent wants is for their years of hard work to be liquidated due to poor planning. Liquidation can lead to high estate taxes and a loss of significant value for your heirs. For more information on how to protect your hard-earned assets, contact Reilly Wolfson to discuss a comprehensive Estate and Succession Plan.