The preservation of the wealth you have built depends on a clear and strategic business plan as part of that plan you need to consider succession.
What happens to your business when you die? If you are an owner of a private or family-owned business and have no succession plan, your interest in your business will be subject to probate. And what happens if your business’s and your family’s interests are not aligned?
As an alternative to probate, a well-written business succession plan will allow you to make it clear who takes over your business and allow for a smooth transition.
As with any estate plan, you begin with your priorities. Is the long-term success of your business most important to you? Or is your highest priority preserving family wealth? Are the two mutually exclusive for your business?
Notably, even if you never created a legal entity, there will be things that need to be handled upon your death. Even if your goal is simply to wrap up your business and give someone the authority to collect your accounts receivable, you want to put in place a succession plan to avoid probate.
Your business organizational documents, such as your operating agreement, can set forth the seamless transition to transfer your business. How you structured your business (LLC, Partnership, Corporation) will impact how your succession plan needs to be structured.
What succession options are available?
If you have a spouse, child, or other family member who works for the business, you can pass your business on to them.
If you are not transitioning your business to your spouse or to the next generation, perhaps you co-own your business with other(s) or have a talented employee who wants to purchase the business. You can include a buy-sell agreement that allows the remaining owner(s) (or employee) to have the right to purchase your interest in the business from your family. This ensures your family is fairly compensated and allows the business to continue. The sale of your business to co-owner(s) or employee(s) will require an agreed upon price or the ability to obtain an accurate valuation of your business.
You can also transfer ownership to someone for the sole purpose of giving that person the authority to wrap up the business.
But you also don’t need to wait until you die.
Along with planning for the transition in the event of your death, business succession planning can also address who takes over your business upon your retirement. If you plan on retiring from your business, you will need to decide ahead of time how you want your business to continue. Do you plan to remain involved in any way after you retire? Is it important that you receive an income stream after you retire?
You will need to decide how important is it to for your business to remain in the family. You probably also want to check with your family members to make sure they feel the same way.
If you are planning on transferring your business to a family member when you retire, do you expect to receive fair market value for the business? Or do you view the business as your children’s inheritance, and therefore do you not expect them to buy into the business?
What do you think your child expects?
As you are deciding how to proceed with transitioning your business, it is recommended that you consult with various stakeholders. A good place to begin is with the family members who are active in the business. At some point, you will want to bring in the entire family, even those not involved with the business. What about their spouses? And your employees?
There are many options for your business. With the right business succession plan, you maintain control over the outcome and protect your legacy.
The influence of trans-generational succession intentions on the succession planning process: The moderating role of high-quality relationships: