Your business is going well and even includes two of your six kids in its management. What will happen when you decide to retire or die?
It can be quite tricky if you don't have a business succession plan, according to Johns, Flaherty & Collins attorney Bob Smyth. Depending on the type of business you have, this can be important both financially and, frankly, to keep peace in the family.
If not done properly, "business succession can cause extremely hard feelings, both for the children involved and the children not involved in the business," Smyth said. "You can create all kinds of problems."
A succession plan is less important if you have just started a new company or if it is the kind of service business like a lawyer or dentist that is dependent on you personally for its success. Unless your children have that same kind of training, passing your business on to them might not be possible.
A significant issue in a business succession plan is whether you divide it in equal parts even if only some of the children work for the company today. If you do, you might find some of your kids without specific knowledge or interest in the company taking control. This could lead to sibling infighting which could affect the long-term future of what you created.
If you decide to leave it to the children who have been active in its management, you could cause hard feelings unless you equalize for the others in other ways, such as with cash or other assets in your estate.
And then there is the issue of a loyal employee whom you may want to include in the future management of the company. Finally, depending on your situation, you might be concerned about estate taxes.
"Don't wait until you are ready to retire," Smyth said. "It is better to have a plan well in advance."
To determine whether you need succession planning, ask yourself these questions:
- Is your business valuable even if you are not involved?
- Are you considering transferring ownership and/or control of the business during your lifetime?
- Do you want an orderly transition?
- Is there a logical successor to manage your business?
- Should ownership be given only to those who are active in it?
- Would key employees stay on with someone else heading it?
- Will you and/or your spouse need cash flow from the business for your retirement?
- Do you have alternatives for equalizing the distribution of estate assets among your children?
- What impact would estate taxes have on the future of the business and your family's needs?
Information provided by Bob Smyth, business attorney at Johns, Flaherty & Collins. For a business or estate planning attorney, call Johns, Flaherty & Collins at 608-784-5678.