Business succession planning employs various estate planning strategies that are meant to improve the chances of success for a family business when the original owners retire, pass away, or are simply ready to transfer the family on to the next generation. This business succession planning checklist will help you make sure you have prepared yourself, your family and your business for the future.
- Decide who will run the business when you are no longer able to. Who in your family is prepared to continue running the business? If your family cannot continue the business, who can?
- Be sure you have sufficient resources to hire someone to replace you if necessary. In the event your family is unable to run your business without you, you should consider their need for cash. Having a life insurance policy in place is an option.
- Make sure you have a buy-sell agreement in place. One of the most effective strategies for protecting your family and your business when you retire is a buy-sell These agreements can be either voluntary or mandatory. A voluntary agreement allows your business partners to negotiate the purchase of your interest in the business. A mandatory buy-sell agreement leaves no other option. It needs to be well-prepared and be clear as to which events will trigger the agreement. Those events typically include death, disability, incapacity, bankruptcy, loss of professional license, and retirement.
- Make sure you have sufficient income for retirement from your business. With family businesses, may be especially important to consider retirement planning. Why? If the business owners take a substantial amount of money from the business when they retire because they did not plan for retirement appropriately, the next generation will not be too happy. If you want to protect your family’s interests, plan ahead.
- You must have a management succession plan. One of the most overlooked business succession issues has to do with management. In fact, this aspect of business planning is the most often neglected. It requires being realistic about which members of the family are capable of taking over the business when the senior generation is ready to pass on the business.
- Consider the diverse skill levels of family members in your business succession planning. As the owner, you need to take into account the various skills of the next generation, as well as their interest level in participating in the business. If there is one sibling, for example, who is interested in taking over the business that does not necessarily mean every sibling will be.
- Plan for the potential burden of estate taxes on your family business. With the goal of business succession planning being to successfully transfer the family business to the next generation, it should be done in a way that increases the likelihood of success. As such, estate taxes must be a primary concern.
- Consider transferring interests in the family business to your children as gifts early on. Many business owners do not recognize that they have the ability to begin transferring interests in the business to their children at an early age and still retain complete control.
- Be sure you have chosen the proper business entity. First, you need to understand your business entity choices and then determine which is right for your business. Two choices to consider are the family limited partnership and the limited liability company. These are often the entities of choice because of their greater asset protection abilities and the flexibility they offer in terms of income taxes.
- In addition to your business succession plan, you must have an overall estate plan. However, when you create your estate planning documents they need to be carefully created so they to fit together with the overall business succession plan.
- Consider creating a revocable living trust to own the general and limited partnership interests of the business. That way, either you or your successor trustee in the event of your incapacity, will be able to manage the partnership without the need for a conservator or guardian.
- Married couples should be in agreement with regard to the ultimate disposition of the family business. Typically, the spouse who primarily operates or manages the family business neglects to discuss and consider the wishes of the inactive spouse. If this important issue is overlooked, it may cause the business succession planning efforts to be more complicated or costly.
If you have questions regarding business succession planning or any other family business planning matters, please contact the experienced attorneys at the Cochrangersh Law Offices, P.S.C. for a consultation. You can contact us either online or by calling us at (502) 423-7023. We are here to help!