For many Americans, owning and operating a family business is part and parcel of the American Dream. If you count yourself among those people, you have undoubtedly invested a significant portion of your life and your savings into your business. Failure is not an option. With that in mind, you probably go to great lengths to protect your business from things such as theft, natural disasters, and even market slow-downs. What you may not have in place, however, is a plan to protect your business in the event of your incapacity, retirement, or even death. Incorporating a family and business succession planning component in your overall estate plan is the best way to ensure your business is protected if something happens to you.
The Challenges of Operating a Family Business
When things are going as planned, operating a family business can be both financially and emotionally rewarding. Even then, running a family business is often extremely stressful and exhausting. Most small businesses face their share of struggles; however, a family run business will face some additional hurdles that are unique to family businesses. Failing to recognize, and plan for, the challenges your family business may face puts your business at greater risk of failure in the long run. By way of illustration, see if you can easily answer the following questions:
- Are you planning to pass down the business to the next generation? If so, have you discussed that intention with your designated replacement?
- Have you discussed your plans with the rest of the family? Do they accept your decisions?
- Do you have a concrete plan in place to teach your designated replacement how to run the business?
- Do you have a plan in place to pass down your legal interest in the business to the next generation?
- If something were to happen to you right now that prevented you from being able to run the business, is someone prepared to take over the day to day operation of the business?
- Does your temporary replacement have the legal authority necessary to run the business in your absence?
- Would employees, suppliers, and customers accept your replacement or might you lose business in your absence?
- Will your business be kept out of the probate of your estate?
- Can your business withstand the tax ramifications of your death without losing critical assets?
- If the business gets held up in probate, will your family have sufficient assets to get by until it is sold?
- If no one wants to carry on the family business, is a plan in place that ensures your loved ones receive a fair price for the business after you are gone?
If you answered “no” to any of these questions, your business is potentially at risk. The more “no” answers you gave, the more hurdles your business may face in the event of your incapacity or death.
What Should Be in My Family and Business Succession Plan?
The tools, strategies, and documents that you include in your business succession planning component will be tailored to your unique business and to the plan you have for your business in your absence. One of the first things you need to decide is whether or not any of your children wish to take over the business upon your incapacity, retirement, or death. If none of them are interested in taking over, you may wish to enter into a Buy-Sell Agreement which ensures that your loved ones will be entitled to the full benefit of the value of your interest in the business. A Buy-Sell Agreement works best when you have a partner; however, you can enter into one with an uninterested third party. In short, a Buy-Sell Agreement allows you to determine ahead of time what your interest in the business is worth or, in the alternative, provides an agreed upon method of valuing the business when the time comes. Your partner(s) or a third party agrees to purchase your interest in the business at the agreed upon price or using the agreed upon valuation method should certain events occur. The proceeds of the sale are then used to provide for your loved ones in your absence.
If you have a child who does want to take over the business, you may want to create a Family Limited Partnership (FLP). With an FPL, you maintain majority control and day to day management of the company for as long as you wish; however, your successor can also begin to learn the business while you are still around to provide guidance and advice. You are also able to slowly transfer your legal interest in the business to your child(ren) over time which produces some significant tax advantages.
Contact Roseville Business Succession Planning Attorneys
Please download our FREE estate planning checklist. If you have additional questions or concerns about family and business succession planning, contact us at the Northern California Center for Estate Planning & Elder Law to find out today by calling (916)-437-3500 or by filling out our online contact form.