Importance of Succession Planning for Continuation of Your Family
For years many people have been working hard to build their family business. The owner's knowledge of the business, customers and strategies is one of the most important factors in the success of the business. Unfortunately few entrepreneurs have stopped to wonder what would happen to the business if they were no longer running it. Over half of all family owned business do not survive from one generation to the next. The owner may have life insurance, but what would happen to the business if he died unexpectedly? Would the spouse and children who have never set foot in the door have to suddenly attempt run things? Is it fair to burden them with that responsibility at a time when they are already grieving? If the business is a partnership, do the partners have a buy-out agreement? Where will the money come from to buy out the deceased partner's share? What if the owner is merely disabled and can no longer work? Appropriate life and disability insurance, can help solve many of these issues, as can a written buy-out agreement where there is more than one business owner. Many business owners wait until it is too late to properly plan and they are uninsurable, and obtaining life insurance is no longer an option.
Serious consideration should be given to how the transfer of the business will affect the family, not only financially but also emotionally.
Succession planning should be a priority for every family business. If you own a family business, retirement is not as easy as giving two weeks' notice and collecting your pension. Generally although the principal has retired, he is still the majority shareholder and still expects to have an income from the business. Insuring that income makes the answers to questions like: Who is going to manage the business while I soak up the sun? Will the customers leave and the income go down if I am not there? Can I sell the business as an ongoing concern, and what about capital gains tax?
It is far better to plan ahead
for a smooth transition. Frequently some but not all of the owner's
children work at the business. Others are not interested in the
business except as a means to maintaining their lifestyle. Sometimes
there is a key employee would might be interested in taking over
in the future. Planning for the succession of a family business
is complicated by the expectations and emotions of the other
Continuation of management means the owner must plan in advance by training a child or key employee to run the business, including introducing them to customers. The owner does not necessarily have to be actively involved in the business. So, if the children are not interested, they can be passive owners while someone else runs the business. Ownership may be transferred to several children while only one of them works as the manager of the business, or a non-family member may be hired to manage the business (perhaps a long time employee who trained under the original owner).
Of course, everyone wants to
minimize death taxes. There are strategies that will help reduce
estate taxes, such as the incremental transfer of ownership to
your children. Also, if the business is a corporation, the corporation
could be reorganized to provide for both common and preferred
stock. The common stock is exchanged for preferred shares with
a fixed value and majority voting power while the children can
be gifted with the common shares, thus passing future capital
gains tax on the appreciation to the next generation.
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