According to the Conway Center for Family Business, family businesses account for 64% of the U.S. gross domestic product (GDP), yet 43% of family businesses have no formal succession plan. While the number may shock you, it is not surprising that many small business owners are consumed by the myriad responsibilities of running their businesses.1
Nevertheless, owners ignore succession preparations at their peril and possibly at the peril of their heirs.
There are a number of reasons for business owners to consider a business succession structure sooner rather than later. Let's take a look at two of them.
The first reason is taxes. Upon the owner’s death, estate taxes may be due, and a proactive strategy may help to better manage them. Failure to properly prepare can also lead to a loss of control over the final disposition of the company. Typically, estate taxes are due nine months after the date of death and must be paid in cash. In addition to estate taxes, there may be a variety of other costs, including probate, final expenses and administration fees.
Second, the absence of a succession structure may result in a decline in the value of the business in the event of the owner’s death or an unexpected disability.
The process of business succession is comprised of three basic steps:
- Identify your goals: When you know your objectives, it becomes easier to develop a plan to pursue them. For instance, do you want future income from the business for you and your spouse? What level of involvement do you want in the business? Do you want to create a legacy for your family or a charity? What are the values that you want to ensure, perhaps as they relate to your employees or community?
- Determine steps to pursue your objectives: There are a number of tools to help you follow the goals you’ve identified. They may include buy/sell agreements, gifting shares, establishing a variety of trusts, or even creating an employee stock ownership plan if you wish employees to have an ownership stake in the future.
- Implement the strategy: The execution step converts ideas into action. Once it's implemented, you should revisit the strategy regularly to make sure it remains relevant in the face of changing circumstances, such as divorce, changes in business profitability, or the death of a stakeholder.
Keep in mind that a fundamental prerequisite to business succession is valuing your business.
As you might imagine, business succession is a complicated exercise that involves a complex set of tax rules and regulations. Before moving forward with a succession, consider working with legal and tax professionals who are familiar with the process.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.