Entrepreneurs are risk-takers with a beneficial disregard for rules. Facing failure and then beating the odds is a hard task that that only a few can accomplish. After a lifetime of work many small business owners want to keep their hard earned company and give it onto their children rather than sell it to a stranger. Passing on a business is a complicated task with a lot of implications. Prepare yourself first and the process will be a lot easier. Here are some essential points to consider when creating a business succession plan.
1. Decide who will take over the business
When choosing who will inherit the business it is important to select someone who will best fit the needs of the business. The best choice is not always the most high-performing employee. It might be smart to consider someone who has an eye for the future of the company in a shifting marketplace.
You can also decide the best fit over time. Let your children know that one of them can take on the business but you want to see how they will handle things first. Give them time to learn about the company finances, processes, and politics. After watching their learning process then the decision might surface on its own.
If you end up deciding that you want to give the business to more than one of your kids then you should consider establishing a buy-sell agreement. This means that if one of the co-owners dies someday that the other co-owner will inherit the business rather than spouses or grandchildren. All of these decisions can be summarized in a business succession plan which is put together by you and your attorney.
3. Decide the best way to pass on the business
Once you have decided who will take on the company when you are gone, then you will need to figure out your succession plan strategy. This decision will have a major impact and should be considered carefully. Some choices that small business owners can consider, but are not limited to, include:
Put the business in your will. If you choose to write the succession of the business in your will then the company will stay with you until you have passed on. Some owners prefer this long-standing method to keep control over the business. This way you will keep a steady income while making decisions into your retirement. Yet many business owners prefer to pass their company on while they are still around so they can guide their successor.
Give the business to your children as a gift. This method is used often to avoid inheritance taxation. You will still need to pay a gift tax. There are several methods to reduce gift taxation, so speak with an attorney about this matter.
Sell the business to a family member. This is a popular method of passing on a family business because many parents want to see their children work hard to succeed like they did. If you sell the business to your children using a promissory note then they will need to pay the interest and principal over time with income from the business. This method is also helpful to the original owner because they can continue to gain income.
Transfer the business in a trust. Another option is to pass the business on to a child in a trust. The biggest advantage of this method is that it protects the successor's interest so the business will be less at risk if they get divorced or sued.
3. Decide how to accommodate the remaining family members
It's common that small business owners will have several children to split an inheritance between. One or two of the kids might have interest in the business, while the other has veered onto their own separate career path. The family business might be one of your best assets so it can be difficult to keep the inheritance fair in this case.
One thing you can do is to put a life insurance policy in the remaining sibling's name. Another option is to leave other important assets to your remaining kids such as the house, a trust, or other personal assets. It is possibly to divide assets fairly in the end. If you are considering passing on a small business to a family member then contact an attorney to get these matters sorted out sooner rather than later.