These are the questions that face many business owners engaged in estate planning. This article aims to demystify business succession by offering some thoughts about the topic.
Many business owners wonder whether selling their business or gifting it to their children will have the most positive impact on their children’s lives. The answer depends on many factors, and usually cannot be predicted with certainty. A closely held business typically represents a concentrated wealth position. On the other hand, cash or other liquid assets offer the opportunity to diversify our wealth.
Are your children interested in your industry, and do they have the type of skills and talent that can help protect and grow your business exponentially? If yes, you are probably inclined to gift your business interests to your children. Conversely, would your children benefit more from a diversified portfolio of assets? If this is the case, then you would probably do better to sell the interests in your business, and use the proceeds to help your children thrive. In a hybrid scenario that involves ownership separated from management, you might decide to transition business ownership to your children, but vest managerial control in various key personnel.
A business has a range of values, depending on who runs the business, how they run it, and what general market conditions they encounter. The profits that a competitor can make from your business might be significantly larger than the profits that your children can make—or vice versa. Also, the answer to this profits-driven consideration may change over time. Therefore, one major goal of a business succession plan should be its flexibility. If you passed away tomorrow, to whom would the stock in your business pass, and what tools would be available to such new owner(s) to help protect and grow the business? The attorneys at Myatt & Bell, P.C. stand ready to help you answer and address this question.
To make your business succession plans flexible, we are ready to recommend a variety of options to suit your goals. For example, you might decide to enter into an agreement with your key employee(s) that allows you to either sell the business, or else require the key employee(s) to run your business. Also, we might use your strategic tax planning to pass some stock in your business to your children via planned lifetime gifting. In doing so, you could combine the advantages of the annual gift tax exclusion with the goal of seeing how your kids handle their minority ownership stake in your business. Depending on how much your children enjoy contributing to your business and work well (or not well) together, you and your children could agree to allow one child to buy the stakes of the other children on fair and pre-defined terms.
The discussion above includes just a few of the ideas that we can provide. Like most things in life, discussing ideas is only half the mission. Accomplishing your business succession plans actually requires following through.