If you own a family business, what things should you be thinking about related to business succession and estate planning? This is the discussion we are going to have today.
Own a Business?
If you own a business, we can call it a family business or a small business, but you own the business. What should you be thinking about? Often as a business owner, the business is your biggest asset, whether that’s the actual value of the business today if someone bought you out, which sometimes is kind of low and should be worked on. But as an asset that produces money as an ongoing concern, your business is likely to be a major asset if not the major asset in your estate. And the first thing to consider with all planning related to your business is the success of the business, and the continued success of the business is the main concern. Because if your business does not continue to make money, it does not matter who you give it to, how you split it up, it’s worthless. Could be even worse than worthless, it could be a headache to wind up while it’s being worthless.
Planning when Owning a Business
The first thing to think about with any planning around your business is going to be making sure that that planning ensures to the greatest possibility that you can, that your business is going to continue to be a success. Another thing to consider is equal versus fair. If you are thinking about transferring the business to children, your children. And you have more than one of them, it may be that one of them is interested in the business, has helped you in the business, is working in the business, and another one of them has no interest in the business. It would be equal to give each of them 50% of this business, it’s not fair in the sense that one of them has had nothing to do with it, and the other one has been working in it and investing in it.
How are we going to ensure that the business succeeds?
And back to the question of, how are we going to ensure that the business succeeds? It’s probably not the best way to ensure the success of the business either, so we do wanna keep that in mind. Business valuation is another main question because as we consider the idea that maybe we’re not just giving an equal share of the business to each of our children, we need to know what is this business worth. And so there are professionals that come in and look at your business as an ongoing concern, look at your business as if we sold it today, and can give you a value for that. That is often something worth doing while you’re thinking about how would I make sure that we are being fair to everyone? Because if you give the business, let’s say we give the business 100% to the child who’s been working in the business, and this is your major asset. We may not feel fair toward the child that hasn’t been working in the business.
Something to consider is a buy-sell agreement, that would allow the child who is working in your business to buy the business from you, therefore having a pot of money that you can use in your estate and distribute to other child or use for yourself however you want to do that. That is a good way of transferring business. Of course, to have a buy-sell agreement that works, we need to have it funded. And so you might have some kind of insurance to allow that person to buy the business, to make sure that it’s not just an offer, that it’s something that realistically can happen if something unexpectedly happens to you before they are ready to buy it. And so we want to make sure, or a possibility is a buy-sell agreement, and if that is in place, insurance to ensure that it can actually happen.
Another important thing to think about, particularly if you have an LLC are LLC provisions so your LLC can govern what happens in case of a divorce? What happens in case of your death? What happens if you were incapacitated and cannot keep running the business? And making sure that your business documents are very clear, and there are no questions about who is in charge and what should happen is really key to ongoing success for business in case something unexpected happens. These are a few things that you should be thinking about and considering, obviously it’s a huge topic and there are lots of other things that you might want to consider. But thank you for listening and please subscribe for more content.