The importance of succession planning for your Colorado family business
Making business plans for eventual owner retirement, disability or death can be crucial to future financial health of all involved.
When a person establishes a new business, life may seem like it will stretch out endlessly over many years, so the question of what will happen to the company at the owner’s retirement, disability or death can seem like a distant, unimportant question. In reality, business succession planning should begin as early as possible in the life of the business to protect the owner’s investment as well as his or her financial, personal and family interests.
After all, while most people prefer not to think about sudden death or disability, unexpected accidents and illnesses do happen. Engaging in smart business succession planning now will better protect the financial and personal security of the owner; his or her spouse, children and other family members who depend financially on the business; and valued business partners, executives and employees. In addition, having a plan in place that springs into action upon the owner’s sudden departure can minimize business losses from the transition.
Working with an attorney from the outset who understands business succession planning issues can be crucially important to these goals. For example, even the choice of the type of business entity at the inception of the business can have an impact on the options available should the business need to be restructured, recapitalized or sold upon the owner’s eventual retirement, disability or death.
Even if succession planning was not considered when a business began, steps can be taken at any stage of the business to better plan for succession when the owner is no longer involved. Legal counsel can provide information and advice about various options, their pros and cons and tax implications.
The owner must consider his or her long-term goals for the business, for him or herself and for the family. Basically, in light of personal concerns, a decision must be made whether the business will continue operating, be sold or be dissolved.
Many factors will influence succession planning such as:
- Are there already co-owners and are they the owner’s spouse, other relatives or nonfamily?
- Is the owner’s spouse or children involved in the business or will they be after the owner is not?
- Does the spouse or children want to work in the business and do they have the skills to do so?
- What financial provisions are there for the owner personally during retirement or in case of disability?
- In case of owner death, what provision will be made for financial support to the surviving spouse and dependent children?
- Will particular relatives, executives or employees own the business and how will they finance the purchase?
- If operations will continue, how will cash flow, expenses, contractual obligations and licensing issues be handled during transition?
- Does it make sense to wind down the business, liquidate its assets and cease operations?
- Is there a profitable market for selling the business considering that sometimes closely held businesses, while profitable to the initial owners, may not be desirable to people outside the family or inner circle?
- What are the tax ramifications of various options, including the impact of estate tax?
Some of the legal tools potentially useful to a business succession plan include buy-sell agreements, employee stock ownership plans or ESOPS, strategic use of life insurance proceeds, recapitalization and more.
From her office in Arvada, lawyer Karen Brady and her team at the Brady, McFarland & Lord, LLC, advise clients in the Denver area and across the state of Colorado about business succession planning and on a wide array of estate planning and business issues.