THANKS TO CZEPIAGA DALY POPE & PERRI, LLC, author of this article. (written, March 22, 2019)
*I came across this article last year and I thought I would pass it forward. I thought it was written very well and had a great message to it. Should you have any questions, give me a call. Thank you Czepiga, Daly, Pope and Perri.
Building and growing an independent family business is an accomplishment to be proud of. It takes an enormous amount of passion, ingenuity, and downright grit. Preserving and protecting your business also requires some effort, but it’s a task many business owners overlook or put off.
Business succession planning, like any kind of estate planning, is something that should be addressed with the help of a professional well in advance of the actual event. Unfortunately, the majority of family business owners are missing that window of opportunity. According to a 2016 survey from Price Waterhouse Coopers, while 69% of family businesses surveyed expected the next generation to take over the business, only 23% had invested in creating a robust and well-documented business succession plan.
It’s not difficult to understand how business owners find themselves without a succession plan. It’s a complex and time-consuming process that involves addressing hard realities and tough questions. But, it’s also a task that’s well worth the investment of time and money in the long run.
If you own a family business and have not yet developed a thorough business succession plan, you may want to consider the following list of questions. These cover just some of the issues a good plan would address. It’s really never too early to start thinking about what’s next for your business, and these questions will put you on the right path.
Who will take over when you’re gone?
- Whether you’re taking the precaution of planning in case of unexpected tragedy or simply doing due diligence in advance of a planned retirement, one of the biggest questions you need to answer is who will take the reins when you’re no longer in charge.
- If you were to become incapacitated or die unexpectedly, is there someone ready to step in to run the business?
- In such a situation, would your family or other business stakeholders have fast access to funds that would allow them to hire any necessary resources to keep the business going?
- Is your family protected against financial risk if you should pass unexpectedly?
- Do you have a detailed management succession plan that clearly defines who will take over which roles?
- If you face a temporary disability, do you have a business Power of Attorney in place to manage financial affairs related to the business?
How much control would you like to retain?
- Are you aware that there are gifting strategies that allow business owners to transfer portions of a business into trusts for children or other beneficiaries while still maintaining complete control over the business?
- Do you understand the difference between a family limited partnership and a limited liability company and how each will affect your ability to maintain control and protect assets?
- Do your estate planning documents dovetail with your business succession plan to ensure that everything goes according to your wishes?
- Are you allowing children who may one day inherit the business the opportunity to gain management experience well in advance of having to take over?
- Is your business managed based on a majority rule situation, and – if so – are you sure you will always be in the majority?
What do you need to consider in arrangements with family members, co-owners, non-family owners, third parties, etc?
- In the case of your or another co-owner’s death, do you have a mandatory buy-sell agreement in place that triggers the automatic purchase of business interest by other co-owners (protecting beneficiaries of the deceased from unintentionally becoming business owners)?
- Does your buy-sell agreement cover all potential situations including death, disability, incapacity, bankruptcy, loss of a professional license, retirement, etc.?
- And does your buy-sell agreement adequately provide for the payment to cover purchase of the departed owner’s interest?
- Have you defined the value of each owner’s interest in the business, based on appraisal, fixed price, book value, annual earnings, replacement cost of hard assets, or some other method?
- How are you addressing the needs and rights of siblings with varying levels of skill and interest in the business? How will you avoid conflict during a transition of ownership and management?
- Do you know how a living trust can help reduce conflicts between siblings in the event of your premature death or incapacity?
- Do the wishes and expectations of your life partner – whether he or she is directly involved in the business or not – align with yours, and has that alignment or any disagreement been addressed in the business succession plan?
What about taxes – estate, gift, and capital gains?
- Do you know how estate taxes will figure into the transfer of the business to the next generation?
- Are you working with an estate planning attorney who is an expert in the diverse and nuanced issues of accounting, insurance for liquidity, investment, etc.?
- Do you understand how the timing of your decisions will affect estate and gift tax rates, and how early planning can preserve more of your business’ value for the next generation?
- Do you know the best strategies for reducing your taxable estate while still maintaining control over business decisions?
What if you or another co-owner want to sell shares/interest in the business?
- Do you have an agreement that gives first right of refusal to other owners?
- If you’re selling to an employee or outside purchaser, will you provide financing?
- If you do sell to a third party and provide financing, what happens if the business fails? How will you get your money?
- What rights and role do you have if you are owned money by the purchaser over a 5- or 10-year promissory note?
- What happens if there are disagreements and you want “out” of the deal or want other owners out? What are your options in such a situation, and what’s at risk?
How can you convert your years of hard work into an income stream that supports your retirement?
- Have you made plans to proactively accrue funds for retirement well in advance of leaving the business?
- How will you protect the business value for the next generation while still adequately funding your retirement?
- Are you familiar with grantor retained annuity trusts (GRATs) and grantor retained unitrusts (GRUTs), which allow you to transfer business assets to your children while keeping a source of income for your retirement?
Clearly, there are many moving parts to a complete and thorough business succession plan. There are a lot of scenarios, personalities, and consequences to consider – for your family, your business, and your own retirement.
If you’d like to find out about your options, feel free to reach out and email me about your concerns. I will send you some FREE great information about planning, ALONG with some short videos about our planning process. Again, I thank the author for this well written article.
Thomas J. Perrone, CLU, CIC
If you feel you need to organize your estate, email me a note and request my Blueprint FAQ Booklet. It will explain everything you need to know about how we work and our process.
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