Needless to say, a small business normally comprises the largest part of one’s estate. Unfortunately, most business owners fail to address the need for succession planning because it is human nature to put off decisions concerning death, disability or retirement. But here’s a typical scenario: upon the departure of a business owner, there are three choices for remaining family members; sell the business, liquidate the business or try to continue operating. Because of this, succession planning is critical in carrying forth both an orderly transition of power to new owners as well as providing continuity for employees and existing customers.
A properly drafted buy-sell arrangement that is adequately funded can provide financial protection for both family and business. Designed effectively, the plan can allow surviving family members and owners to enjoy ongoing economic support for succeeding generations. Additionally, a business succession plan can help ensure that family members receive fair value for the business interest and that surviving business owners secure control of the enterprise. Buy-sell agreements funded with life insurance can provide the necessary cash to ensure the right property passes to the right person at the right time — in a tax efficient manner. Listed below are a few key questions to consider in planning for the future of a business:
» Has a successor been selected to run the business? If yes, has the owner communicated this decision with other family members, co-owners, employees and key customers? Are there obstacles that might prevent an intended smooth transition?
» Has there been a formal agreement for successor ownership established and has an attorney prepared a properly written buy-sell arrangement? If yes, do the terms of the agreement clearly detail how each owner’s interest in the business will be distributed in the event of death, retirement, bankruptcy or even divorce. Does it include input from all parties involved? What would happen in the owner or heir apparent becomes disabled? Is there a contingency plan established to provide funds for this potential risk?
» Are there employment options available for members of the owner’s family who do not take an active role in management or operation of the business?
This is important because there is nothing worse for a business than bringing in family members who are not trained or adept at the workings of a particular business.
» If the family business is to be distributed to children who work in the business, are there sufficient liquid assets available for distribution to a deceased owner’s surviving spouse, as well as children who are not active in the business? If not, a possible solution is life insurance established as an “estate equalization” device for the benefit of non-active children.
Additionally, if there are unstable marriages among the business owners or family members who are active in the business, what would be the financial ramifications of a divorce? Could ownership become diluted by having an owner’s interest in the business exposed to division as marital property in a divorce settlement? This is not fun stuff to think about but it really pays to have matters discussed and thought out — on the front end.
Estimates say that the life of a small businesses normally runs over the span of time from a grandfather to a grandson or as the old saying goes “from shirtsleeve to shirtsleeve in three generations.”
Having the foresight to prepare for contingencies as cited above provides a good way to keep a family business in place.
There are plenty of ways for a small business to go under these days but it can be a crying shame when the results come from the lack of good planning.
» Ike S. Trotter, CLU, ChFC is a credentialed Financial Advisor in Greenville. He can be reached at the Ike Trotter Agency at 831 South Main, in Greenville, 38701, 662-378-9550 or firstname.lastname@example.org.
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