Like it or not, there comes a time in all family businesses when tough decisions will need to be made regarding the ownership and control of the business. It’s important to create a thorough estate plan for the transfer of wealth to your heirs and a succession plan for your business, particularly if your children are involved in it.
Effective exit strategies
High net worth individuals who don’t have an estate plan also run the risk of a significant reduction of estate assets as a result of income taxes, probate fees, and other related costs. Estate planning involves deciding how to divide assets among family members.
If you own your own business, this can get quite complicated and it’s important to have an appropriate exit strategy in place long before the situation calls for it. This is even more important if you have a blended family, with stepchildren or children who are half-siblings.
Options for estate planning for your business
- Unequal distribution of business shares i.e. giving to those who are involved in the business while giving other personal assets to those who aren’t involved. This might increase the chances of the business surviving as it’s being managed by those already in the know and can be a reward to these individuals.
However, it might also lead to feelings of unfairness and lack of opportunity for other family members.
- Equal distribution of business shares i.e. giving each child an equal amount/share, regardless of whether or not they work in the business. This makes distribution of assets much easier and can preserve family relationships. However, it might mean the end of the business with too many decision-makers and not enough focus on doing the work.
Who will run the business?
There’s no correct answer and no guarantee of longevity. Rather, it’s about looking ahead to the business’ future, engaging in a fair and legal process, and deciding what will work best for your family.
Some questions to get you started…
- Does one of your children have an interest in or ability to carry on the business when you are gone?
- How will you offer a fair alternative to your other children if you decide that one child will benefit more from the business than the others?
- What impact will your decision have on any partners you might have in the business? Are there legal constraints or agreements that will change how you are able to distribute your portion of the business if you do have partners?
- Should you sell the business outright and divide the profits between your children?
- Do you have a sound and up-to-date financial and taxation plan to ensure that your personal wealth is preserved and the financial well-being of your heirs is protected?
Ownership and control of the business
Having an estate lawyer help you to understand your options and draw up the relevant paperwork can help make this an easier process. Once decided, you should communicate your plan with your family to ensure that everyone understands how and why you’ve come to your decision.
As with all facets of estate planning, communication with your beneficiaries can avoid conflict and confusion later on. A point to consider – besides death, as a business owner, you should also consider what would happen if you were disabled or when you retire. What will your exit strategy be?
You might want to explore the option of transferring the business to the next generation before your death while still maintaining control over key business decisions. Earlier transfers might also mean less risk of estate and gift taxes.