Estate Planning for the Business Owner

Estate Planning for the Business Owner

For many of my clients who own businesses, their business is the largest asset in their estate.  Yet, many of them fail to plan for this important asset.  For family-owned businesses, there is generally one simple choice that the owners must face regarding their business – should we pass the business onto our children or should we sell it?  This blog discusses some key issues in making this decision.  Before I start, I want to thank Chris Siegle at J.P. Morgan Chase Bank for some great information that I incorporated into this blog!

One Key Timing Decision for Family Business Owners

In addition to the “pass on vs. sell” decision, there is also a timing issue in making this decision.  In general, business owners need to decide whether to (1) face the decision now; or (2) leave it for the children to decide later.  So many times I have seen well meaning business owners leave this important decision up to their children to decide later only to have their children squander the business asset away by fighting about it, sometimes in long, drawn-out court battles.  The much better approach is to tackle making the decision now.

Five Challenges Faced in This Transition

Any generational transitions have challenges, and these challenges can be broken down into 5 areas:

  1. Anticipating the Transition.  If the founding parents are getting older, they need to decide when to transition their business to their children and also who will be the leaders of the business going forward.   This often takes years of planning and implementation.  Therefore, it is never too early to start.
  2. Transferring the Business.  Next, once the timing and the leadership team is identified, the ownership structure needs to be determined, and the legal documents need to be drafted and signed to accomplish the transfer.
  3. Operating under New Leadership.  After the transfer documents are signed, the business has to operate under the new leadership.  This is critical.  All of the key players in the business (i.e., ownership, management, employees, customers, vendors, lenders, etc.) need to have “buy-in” regarding the new leadership.  And most importantly, the previous leaders (often the founders) need to get out of the way and let the new leadership lead.
  4. Sustaining Capital for Enterprise.  Capital is always critical to the successful transition of the business to the new ownership.  If the old ownership takes out too much capital as part of a buy-out or limits the ability of the company to borrow or raise new capital too much, then the new leadership’s “hands” may be tied, making the transition difficult, if not impossible.
  5. Agreeing on a Vision for the Long Term.  Finally, the family needs to agree on a vision for the business going forward that is satisfactory to the older generation and the younger generations of the family in terms of growth, dividends, management changes, etc., as well as to non-family members who are part of the management structure.

Key Lessons

Here are some important lessons to keep in mind as you begin this process:

  • If you want your children to run the business someday, you have to plan as soon as possible and keep adjusting those plans as circumstances, and possibly laws, evolve.
  • U.S estate taxes create a significant hurdle for most business succession plans.  But if you plan properly, your heirs can surmount this hurdle.
  • Psychological factors matter.  Acknowledge, honor, and factor into plans honest assessments of all key players’ perspectives.  This includes the emotional realities of the business founder, his/her spouse, each of the children (whether active in the business or not), and the key employees.
  • Time and resources devoted to properly documenting business succession plans are well spent.  Objective professional advice is definitely required.

How Do I Get Started? Here is Your Action Plan

First, decide whether you truly want one or more of your children to run your business someday.

Second, have a person who is trusted by your children ask each of them, separately, what he or she wants for the business in the future.

Third, make plans for sudden events, business succession, and the disposition of your estate.

Finally, reassess your plans and recheck each child’s intentions every 3 years.

Need help? Please call me today – 602.277.7000

John Even

Our firm has helped hundreds of families just like yours handle a wide variety of business planning, estate planning, probate, and elder law issues.  When families or business owners are not getting along, we can also handle any disputes and litigation related to their businesses, wills, trusts, guardianships, or conservatorships.  Please give me a call, so that I can help you work through these difficult issues with confidence.

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