If you own a family business, you likely invested a considerable amount of blood, sweat, and tears getting your business off the ground. If your investment in the business is now paying off in the form of financial success, it is imperative that you include your business in your estate plan to ensure that the investment you made is not lost. Incorporating a business succession planning component into your comprehensive estate plan goes a long way toward protecting the investment you have made in your family business.
Operating a Family Business
As you likely already know, operating a successful family business can be both financially and emotionally rewarding. At the same time, it can also be extremely stressful and exhausting. Along with the struggles every small business faces, a family run business will face some additional hurdles that are unique to family businesses. If you fail to recognize, and address, the challenges your business may face, you are putting the future of your business at risk. To illustrate how potential vulnerable your business may be, see if you have readily available answers for the following questions:
- Are you planning to pass down the business to the next generation? If so, have you discussed that intention with your designated replacement?
- Have you discussed your plans with the rest of the family? Do they accept your decisions?
- Do you have a concrete plan in place to teach your designated replacement how to run the business?
- How do you plan to pass down your legal interest in the business to the next generation?
- If something were to happen to you right now that prevented you from being able to run the business, is someone prepared to take over the day to day operation of the business?
- Does your temporary replacement have the legal authority necessary to run the business in your absence?
- Would employees, suppliers, and customers accept your replacement or might you lose business in your absence?
- Will your business be included in the probate of your estate?
- Can your business withstand the tax ramifications of your death without losing critical assets?
- If the business gets held up in probate, will your family have sufficient assets to get by until it is sold?
- If no one wants to carry on the family business, how will you ensure that your loved ones receive a fair price for the business after you are gone?
These questions address some of the most important, but not all, of the factors that should be considered when discussing the need for business succession planning. Without a plan, the hard work you put into getting your business off the ground and to the point where it is showing a profit could be for nothing and the future of your business may be at risk.
What Should Be Included in a Family Business Succession Plan?
You have undoubtedly dedicated a considerable amount of your time and resources to building up and/or continuing the family business. Spending just a little more time and resources on the creation of a business succession plan will ensure that your efforts to date were not in vain. Business succession planning involves creating a plan that will ensure your business is protected in the event of your incapacity, retirement, or death. The details of your plan will uniquely fit your business; however, they will aim to answer all the questions above and more.
One of the most important decisions you will need to make within your plan is whether the business is to be passed down to the next generation or sold upon your incapacity, retirement, or death. Making that decision early allows maximum planning time for the transfer of ownership or to ensure a profitable sale. If the next generation will carry on the business, start the transfer as early on as possible. Get your successor involved early so family members, employees, and clients/customers are comfortable with the change in management. In addition, you may wish to create a Family Limited Partnership (FLP) that allows you to slowly transfer your legal interest in the business while maintaining control over the day to day operations. An FLP also offers some important tax advantages that you may wish to consider. On the other hand, if you plan to sell the business, consider entering into a Buy-Sell agreement. This is an agreement that you enter into with someone to purchase the business upon the occurrence of a specific event, such as your incapacity, retirement, or death, at a predetermined price or using an agreed upon method of valuation. This ensures that your loved ones will receive a fair value for your interest in the business.
Contact our Estate Planning Attorney
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about family and business succession planning, contact our North Dakota business succession planning attorney at German Law by calling (701) 738-0060 to schedule an appointment.
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