If you own a family business, business succession must be an important part of your estate planning process if you want to pass the business on to future generations. Developing a business succession plan ensures that future generations can continue to keep the family business going and keep key employees protected and working. Focusing on the longevity of the business and the need to develop a plan for business succession can help make the process of creating an estate plan easier.
In this article, we are going to provide you with five tips to keep in mind while developing a business succession plan. If you have questions about small business or family business succession for future generations, schedule your free consultation with Ball Morse Lowe.
Is the Family Member Interested in Taking Over the Family Business?
As part of an estate plan, a family member would take over the family business when you die. For most small businesses in the United States, business succession takes place in this manner. However, it is best to first talk with the family member or the family members that would be part of the business succession to determine they are interested in playing an active part in running the business.
Simply talking to those who may be involved in the business succession could help avoid many problems. It may be a conversation that you need to have more than once because of the way that family dynamic changes over time. Additionally, people have their own goals that may change over time as well. It is important as the business owner for you to keep in mind that not only could the family member possibly change the way the family business operates, but the person you choose could also change the family dynamic.
Business Succession May Lead to a Change in Goals
Business succession may lead to a change in goals for your small business. This often comes as a shock to many business owners. You spent a significant portion of your life building your small business or your family business. You know what works. Why wouldn't your family member just follow what you know works, especially when you spent all this time developing a plan?
We understand the fear that can come with developing a business succession plan, but keep in mind that the goal is for the business to continue. Your family member or even your key employees could have different ideas, untapped potential, or other goals for the business.
With this in mind, you have options. The first option is understanding that there could be immense value in multi-generational interests and goals. This intersects with our first tip about the importance of having a conversation with the person or persons you are interested in perhaps naming as future business owners. Are their ideas and goals for the business aligned with yours? If not, are they still acceptable to what you see for the business continuing into the future?
The second option is to choose a family member who has the same goals for your small business that you already have. However, this could take away from any potential growth for the business.
Understand Business Valuation for Your Small Business
Assets are included in your estate plan. Your business is an asset. As part of developing a business succession plan, it is important to understand business valuation. Simply put, business valuation is what your business is worth. What your business is worth can impact the business succession plan.
Yet, determining the worth of your business cannot be a guessing game or just a random number. Keeping in mind that business is an asset and that your assets are part of your estate plan, you must remember that its value can impact other matters, including gift and estate taxes (among other matters).
To best determine the worth of your small business or family business, it is imperative to seek the assistance of an experienced estate planning attorney or business attorney. Not only will this give you a more accurate business valuation, but it can also help you address your options related to potential tax matters that may arise.
Understand the Potential Family Member Disputes
As briefly mentioned in our first tip, it is important to understand the potential for family member disputes. Inevitably, there is always the possibility that when it comes to developing a business succession plan, someone will not be happy with your decision. This highlights the importance of having all the important conversations with those you want to be involved in the business moving forward, as well as those who show interest in having a part. The ultimate goal of a family business is to create freedom for your family, not to create rifts. Yet, fights happen. In fact, you may have experienced some of those fights based on your own choices in management, goals, and changes that you've decided to make throughout the course of running the business. Making decisions related to how you would like the business to continue into the future may also cause issues not just between you and others, but between others within the family.
Consider Estate and Inheritance Matters
You will recall under our business valuation tip that we briefly mentioned the potential of estate and inheritance matters. Businesses are assets. Because you are planning a business succession, you are planning to give at least one person something that is worth a significant dollar value. Because of this, it is important to explore estate planning options to determine how best to maximize estate and inheritance options that could reduce the potential amount of estate tax, gift tax, and inheritance tax that must be paid as a whole for the entire estate plan.
Schedule Your Free Consultation
There can be several challenges when it comes to developing a business succession plan for future generations. To learn more about estate planning and business succession, schedule a free consultation with one of our estate planning attorneys to discuss your specific needs. We can help you determine the proper value for your business as well as help you create the right succession plan. Schedule now!