What Will Happen To Your Business?
Small businesses, those with fewer than 500 employees, are the heart of America. In fact, they comprise over 99% of all American businesses. Someday, all of the owners of these businesses will exit their businesses due to retirement, incapacity, or death. But most owners are so busy working that they don’t take the time to think about business succession and estate planning issues. That is the primary reason that only about 30% of all family-owned businesses survive to the next generation; only 12% make it to the third generation; and a meager 3% are functioning into the fourth generation and beyond.
If you are a business owner, you may wonder if you can ever retire, who could possibly take over your business, if you can receive retirement income without going out of business, and what would happen to your business and your family should you become incapacitated and when you die. But there is much you can do to build your business and prepare for its succession if you start planning now, before something happens to you.
No one professional has all the answers. In business succession planning, you will get the best results (and probably save time and money) by working with a team of advisors who can bring their own areas of expertise. Your team may include your accountant/CPA, financial planner, insurance advisors, investment advisor, business attorney, estate planning attorney, valuation specialist, and a business broker if an imminent sale of the business is desired.
Your team will help you determine and work toward your long-term goals. These may include building and preserving the value of the business; exchanging that value for cash with the least amount in taxes; leaving a legacy or making a charitable donation; shifting wealth to your children; rewarding key employees; selling the business at your exit or keeping it in the family.
Most owners have no idea what their business is worth, so a professional valuation is usually the first step. This will help with projecting cash flow, estate and gift tax planning, determining how much insurance may be needed for various purposes, retirement planning, and so on. This also helps you and your advisors monitor progress as you work toward your objectives.
Growing your business and protecting its value will maximize the amount you will be able to receive from it. It can take seven to ten years of proactive planning to successfully prepare a business for sale to an outside party. It can also take years to select and groom an internal successor, whether a family member or a key employee.
During this time, your advisors may suggest that you increase cash flow, develop operating systems, improve company performance, and pay down debt. You may need to restructure the organization, diversify your customer base, create and protect proprietary technology or trademarks, build a management team, and prepare your successor.
Depending on your situation, other specific recommendations may include:
- Asset protection planning.
- Creating a buy/sell agreement with other owners, funded with life insurance. When one owner dies, the remaining owners are able to use the proceeds to buy the deceased owner’s share of the business from the family.
- Purchasing life insurance on the life of an employee who has a critical role in the business. If this person dies while employed, money would be available to continue the business while a replacement is found.
- Using life insurance to provide an inheritance for your children who are not interested in continuing in the business.
Remember, you are preparing for the time when you will not be running the business. You want it to be able to survive without you—whether it continues in your family or with a new outside owner. By starting to plan now, your advisors can help you shift your focus from how much you are making today to the future rewards you can build for your family and your retirement.