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Home / Estate Planning Articles / Next Generation Planning for Your Family Business

Next Generation Planning for Your Family Business

June 17, 2014

Compliments of Our Law Firm,
Written By: The American Academy of Estate Planning Attorneys

If you’re like many small business owners, you’ve poured your heart and soul into launching your business and making sure it thrives. The idea of allowing your enterprise to fade away after you die may be unthinkable. After all, in many ways, your business is your legacy.

As is often the case, you may have focused a lot of your time and energy on day-to-day operations and put off creating a succession plan for when you’re ready to step away from the helm. The problem is lack of planning can have disastrous consequences, especially to those wanting to keep the business in the family.

According to the Harvard Business Review, only 10% of family-owned businesses remain active and privately owned long enough to make it into the hands of the grandchildren of the original owners. What kind of planning should you do if you want your business to have a chance at longevity?

Chart Your Course

First, you need to decide on a direction for your business. Unless you want to dissolve your business upon your retirement or death, you have two choices. You can pass the business on to family members or other beneficiaries, or you can sell the business. Many business owners choose to keep the business in the family. While this option is typically the most appealing, it requires careful planning.

Choose Your Successor

The next step in the planning process is to choose your successor. This is a critical choice, and it can be one of the most difficult you’ll make. Too often, business owners choose their successors poorly. For example, it can be tempting to put your oldest child in charge of your business after your death, even if that child has no experience and no real interest in taking over your company. This choice can prove catastrophic for your employees and for the future of your business.

As you think about potential successors, consider which of your loved ones understands your business, has the appropriate training to fill your shoes, and – perhaps most significantly – has the desire and drive to take control of the day-to-day operations. If no one fits this description, talk to your estate planning attorney about other alternatives appropriate for the size and complexity of your company. For instance, perhaps your family members could maintain ownership and control by serving on the board of directors, while a passionate and knowledgeable employee could handle the daily operations.

Ensure a Smooth Transition

No matter who you’ve put in charge after you’ve retired or passed, anticipate that your successor will need at least a little transition time before he or she is fully up to speed. During this time, it will be helpful to have additional operating cash to smooth any bumps in the road and help keep the company afloat.

Life insurance is one possible source for this operating cash. In addition to serving as a source of cash to smooth your company’s transition, the death benefit from a life insurance policy can also help pay any estate or other taxes that become due upon your death.

Buy-Sell Agreement

If you are not a sole proprietor, you should consider negotiating a Buy-Sell Agreement with your business partners or co-owners. Under a Buy-Sell Agreement, business partners or co-owners agree to buy each other’s share of the business at a predetermined buyout price should one of them become disabled, die, or retire.

A Buy-Sell Agreement serves two essential business planning functions:

  1. It takes the emotion out of what otherwise might become a heated negotiation at the end of a business partnership.
  2. It protects your surviving spouse and children from having to negotiate a fair price for their share of your company after your death.
  3. These are just a few of the planning options that are available to you as a business owner. Don’t leave the future of your business to chance. Talk to an estate planning attorney to explore the full range of options and establish a succession plan that will protect your business, your family, and your legacy for generations to come.

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