6 Key Considerations for Passing Down a Family Business

                                               

As an entrepreneur, you have spent years putting in hard work, sweat, and tears to build your small business. You have thought of every meticulous detail in order for your business to run properly, but have you taken time to consider what will happen to it when you retire, become disabled, or pass away? Although it is often hard to fathom an event that may not occur for many years, it is important to put plans in place in advance. The failure to do so could result in the eventual loss of your business, your business being controlled by the wrong hands, or your spouse being in business with your partner. Here are six factors you should keep in mind in making plans for the future of your small business and your legacy.

  1. Identify a successor(s). Many small business owners plan to transfer their business to a child or children, or sometimes, grandchildren eventually. If you have more than one child, it is important to consider which of them has an interest in stepping into your shoes, as well as whether that child has the skills needed to do so successfully. Don’t assume that just because one child is the oldest, that the control of the business should and will go to that child. The continued success of the company requires that the member(s) of the next generation who will take over the reins have the business acumen and commitment needed to run it.
    Also, don’t be afraid to give your children the hardest, dirtiest, bottom-of-the-ladder jobs either. Working one’s way up through the ranks gives an appreciation of the effort needed to make the whole operation go. One local waste management company owner had his son riding the trucks and slinging trash cans at 430am for months on end. Not only does this help the next generation learn the ropes, they also get to develop relationships with the employees.
  2. Consider having the next generation participate in the business before transferring ownership and management duties. For the continued success of the business, your successor(s) should be trained to run the business before your departure. This training can be accomplished over several years, after which you can start the process of transferring management and ownership of the business. Many business owners transfer management control of the business to the next generation first, while staying involved to a limited extent as an advisor, and then, shifting ownership.
  3. Decide whether to transfer the business by a gift or a sale. Although each family must make its own decision about how the transfer should occur, many business succession professionals recommend that the next generation have an economic stake in the success of the business by purchasing at least part of their ownership interest. If your successor does not have the funds to pay a lump sum for the business, the sale can occur as a buyout that happens over the next several years. Alternatively, the next generation can work for the company at a reduced salary to earn their ownership interest in the business. There are several ways the transfer can take place. As a business law attorney, I can help you decide which option is the best one for your particular circumstances.
  4. If more than one child is well-suited to run the business, put a business structure in place that enables the smooth transition to multiple successors with minimal conflict. This transition can be accomplished by incorporating provisions facilitating a smooth transfer into your partnership agreement or LLC operating agreement, for example. If one or more children are not interested in participating in the ownership of the business, consider providing an inheritance for them from other assets or making them the beneficiary of a life insurance policy.
  5. Think about your own needs for your retirement. If you will need a continuous stream of income, consider continuing to play a limited ongoing role in the company for which you receive a salary. Another option is to require the next generation to purchase the business, providing funds for your retirement needs in that way.
  6. Plan with an eye toward minimizing your tax liability. For example, one option is to transfer the business gradually by making gifts of shares in the business each year that are equivalent to the amount of the annual exclusion (currently, $15,000). We can help you accomplish the transfer of your business in a way that minimizes your income, gift, and estate tax liability.

Conclusion

You have invested a lot in making your business a success, and it is hard to think about relinquishing ownership or control of it. Nevertheless, planning is critical in creating a lasting legacy for your family. We can help you put a plan in place that helps you successfully pass the baton on to the next generation and ensure that you have a financially secure retirement. We discuss some examples of good and bad business succession planning – download the FREE report here.

In other important news:

1 – Have you checked your beneficiaries? The SECURE Act set up new rules related to how retirement accounts can be passed on to heirs and beneficiaries. The old “stretch” of an inherited retirement account is basically gone. Your beneficiaries will have to accept the benefits within ten years.

Did you know that there’s a way to replicate the “stretch” method, help your beneficiaries, AND help out a charity?

2 – One of my favorite people to follow is Peter Diamandis, the futurist and founder of the SpaceX prize. His “Abundance Insider” weekly email is full of fantastic information about what’s coming. Recently, he wrote about how influential AI will be in the coming decade. Think about it, what happens to your business when all levels of decisions can be made before you even think about the existence of a problem? What will this mean for the value of your business? The exit planning discussed above becomes even more important.

3 – It’s never too early to contribute to your retirement. Indeed, business owners have opportunities that many other people do not when it comes to retirement. Would you believe it’s reasonable to put $40,000 or more towards your retirement every year?

Current Books:

As many of you know, I’m an avid reader. At any time, I’m reading 3-5 books between print, audio, and electronic. Here’s the list for right now:

  1. The Generals by Thomas Ricks. The acclaimed author chronicles US generals and battlefield commanders since WWII. I’m just getting to the section on the Vietnam War (about halfway). Had US Presidents continued General Marshall’s method of quickly replacing (and sometimes recycling) generals who couldn’t command in battle, Vietnam & Korea might have turned out much differently.
  2. Pre-Suasion by Robert Cialdini, Ph.D. The master instructor of psychology and its application to marketing provides a guide to making sure your audience is truly ready to listen to and act upon the message you’re giving them.
  3. Enchiridion by Epictetus. The handbook for life from former slave turned schoolmaster and more importantly, stoic philosopher. This is not a novel, but instead a constant companion and daily devotional. Remember, we always have the ability to choose.
  4. The Blood of Elves by Andrzej Sapkowski. The Netflix success and social media buzz caused me to investigate. Having recently finished the Wheel of Time series (14 books), I needed a new diversion. Now that I’m into the story, it’s even more fun.

 

 

 

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