Succession & Transition

Succession, Transition and Exit Planning

The area of estate planning and family businesses (including ownership of real estate) can be complex and must be looked at in detail to determine how the business impacts your estate planning and family. Remember, the business is often the most valuable asset in the estate and what happens to it will have a significant impact on your family’s future.

Questions to Think About

Below are some of the questions the business owner should think about; no two clients will address the issues in the same way.

Estate Taxes

If a business owner dies and the business is, in general, left to someone other than a surviving spouse, the value of the business will be included in determining the estate taxes owed at the owner’s death. The estate taxes can be as much as 45% to 55% of the company’s net value. Proper succession planning is essential if the family wants to continue the business and not be forced to sell it in order to raise money to pay the estate taxes.

Businesses with Co-Owners

What happens when a business has two or more co-owners and one dies, becomes disabled, or wants to retire? Is there a buy-sell agreement in place between the owners stating that one party must buy out the other party? How will the buying party come up with the money to make the payments? Is the agreement funded with insurance? Has the agreement recently been reviewed to make sure that it is up–to-date, especially with respect to how to determine the value of the business for a buy-out?

Businesses with a Single Owner

If the business only has one owner and the business owner dies or wants to retire, is there a succession plan in place to allow the business to continue and be profitable? This planning is important for the family whether they want to be able to continue to receive monies from the company or sell the business.

Sale of Business

There are many questions to consider if the business owner decides to sell the business. Will the business be sold to an outside party or to one or more employees? Will it be transferred to one or more of the business owner’s children who are working in the business? If it is to be sold to employees or children, how will they pay for the business?

Disability and Business Liabilities

If the business owner becomes disabled, is there a succession plan in place? If not, will the business fall apart and will the family no longer be able to receive income from the business? Will the company be marketable if the business owner is no longer able to work (especially if he or she has all the “connections”)?

If there is a line of credit or other debt in the business, it is likely secured by the assets in the business and personally guaranteed by the business owner’s personal assets. How does this affect the business and the surviving family members? Will it require the family to sell personal assets to pay off the business debt?

Children in the Business

If one or more of the business owner’s children is involved in the business, how does this impact the family and the business? If one child works in the business and another child is not involved in the business, should the business go entirely to the child in the business? Are there enough other assets to be distributed to the other child to equalize the estate? If the family owns real estate used in the business, should the real estate be distributed with the business, or be divided between both children? If divided between both children, the child who is not in the business will be involved in negotiations relating to the amount of rent paid by the business, as well as the sales price if the company and the real estate are to be sold in the future. This can cause friction between the children.

If two children are involved in the business, have their future roles in the business been defined, so that when the business owner is no longer in the business, there will be no disagreements between the children as to how to run the business?

These issues can be even more complicated if a son-in-law or daughter-in-law is involved in the business.

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