Only a small percentage family-owned companies survive to be taken over by a family's next generation. An even smaller percentage makes it to the third generation. A microscopic 3% of these businesses operate into the fourth generation and beyond.
The reason: most business owners simply don't have an exit strategy. They are so caught up in the day-to-day business operations that they ignore estate planning responsibilities, which often results in unnecessary estate taxes that drain the life out of their businesses. Also, for whatever reason, they neglect to plan for a smooth transition to the next generation causing business operations to come to a grinding halt.
Who could take over your business? You may have more choices than you think.
Your Business Succession Options
Family members are often a logical choice for business succession. Most business owners take pride in being able to hand over a family business to a child. You may already have one or more children working in the business with you.
Depending on your financial needs and priorities, you can gift or sell your business to family members. Some techniques provide you with retirement income and let you transfer the business at a discount, saving estate and gift taxes in the bargain. Most let you retain some control over its operation.
Be sure to consider family members who will not be involved with the business. Life insurance may be used to "equalize" inheritances. You also need to objectively consider the abilities of family members whom you consider potential successors. Some family members may have no desire to be involved in the family business, while others that are involved with the business may become resentful of those that don't participate in the business operations.
Business partners might also be in line to succeed you. You can have buy-sell arrangements with each other so when one of you is ready to retire or dies, the other automatically buys his or her share of the business. Life insurance is often used to fund these arrangements.
Your employees could also be a source. An employee stock ownership plan allows your workers to reap the benefits of ownership while you retain control until your retirement or death.
Of course, you can also consider an outright sale to another person or company. However, the tax benefits may not be as favorable as other planning options.
To learn more about common estate planning issues, check out our free guide, Estate Planning Pitfalls: The 12 Most Common Threats to Your Estate & Your Family's Future, or to discuss your estate planning concerns, please call our office at 919-443-3035 or use our contact form.
