BUSINESS SUCCESSION PLANNING: FAMILY-OWNED BUSINESSES
Business succession planning for family-owned businesses is vitally important to their survival after the death of the founder(s). By some estimates, for example, more than 70 percent of family owned businesses do not survive the transition to the second generation of ownership.
How can this be avoided? Through proper business succession planning. This article is an overview of the five levels of business succession planning for a family-owned business.
LEVEL ONE: WHAT ARE THE LONG TERMS GOALS OF THE FAMILY BUSINESS?
At this first level, the business owner and the best business succession attorney near me have an open discussion and analysis about the long term goals of the business owner. They discuss current difficulties with the operation of the business, if any, the current financial and health of the business and the lawyer can offer recommendations that are realistically achievable for the family and the business.
LEVEL TWO: HOW CAN THE SUCCESSION PLAN MEET THE FINANCIAL NEEDS OF THE BUSINESS OWNER AND THEIR SPOUSE?
This level focuses on the business owner in retirement and away from running the business. What are goals and plans in retirement? Often a frank discussion of the actual value of the business is needed before these personal goals of the business owner can be discussed.
Once the true value of the business is known the business owner can be better informed about which of their plans and goals in retirement are achievable because the business can provide the income necessary to support those plans and goals.
LEVEL THREE: WHO WILL MANAGE THE BUSINESS DAY TO DAY?
This level focuses back on the business to discuss the people who will run the business after the business owner has retired. Will that be family or employees? Both? Is there a successor already in mind and are they ready to take over the management of the business? Does a mentoring process need to occur, how long with that process take and how will it affect the owner’s timeline to retirement?
If an employee or group of employees will manage the business, how do we ensure they are compensated enough to remain in place after the owner moves on? Many employees are more loyal to the business owner than the business itself. These issues need to be discussed and techniques to keep accomplished and trusted employees on board must be employed to ensure a smooth transition.
LEVEL FOUR: WHO WILL OWN THE BUSINESS AND HOW DO WE TRANSFER OWNERSHIP TO THE NEW OWNER(S)?
This particular level can cause business owners a lot of agony. Here we are focusing on business succession in terms of which family members will receive ownership interest(s)? Then the discussion turns to the best and most tax-efficient way to accomplish the transfer of ownership. Through a sale? Through gifting?
Should the business owner retain voting shares until the proper child or children to own the business is determined? This level is among the most complex because there are so many possibilities all of which can be fragmented further by the individual circumstances of the business and family itself.
LEVEL FIVE: WHAT IS THE PROPER ESTATE PLANNING REQUIRED AND HOW DO WE MINIMIZE TAXES WITH THE TRANSFER OF OWNERSHIP?
This level essentially is the end game because it puts into legal effect the decisions and strategies developed in the first four levels. Chief concerns at this level are minimizing transfer taxes, whether to employ various gifting strategies, including lifetime exemption and annual exclusion methods. Installment sales can also be considered as can private annuities. Both of these are not only sales strategies but can provide a lifetime income to the founding business owner.
A whole host of strategies and options are too wide ranging to discuss in this article but needless to say, whatever estate plan options are chosen are designed specifically to not only effectuate the founding owner’s desires but to ensure that the plan is tax efficient, strategically efficient (if possible) and least likely to cause acrimony among family members and among the business culture itself.
All too often business succession and business owner estate planning focuses on the death of the owner, but not the transition of the owner out of the business during life. All businesses, however, benefit from planning for the inevitable and especially benefit when this planning is done long in advance of problems.
As with traditional estate planning, completed business succession planning can provide peace of mind to the business owner that his family, like the business, is in good hands.
Legacy Law Center assists business owners throughout St. Charles County, St. Louis County, Warren County and Lincoln County to develop a succession plan for their business. If you’re a business owner and need to speak to an attorney about a business succession plan, call our firm for a FREE CONSULTATION to learn how we can help. Call us today at (636) 486-2669!