Business Docx: Business Success Planning Checklist
32 Questions To Ask If You Own A Family Business
What is business succession planning? Business succession planning refers to the practice of using estate planning strategies to increase the chances for the survival of your family business when you retire or die unexpectedly.
- How do I know if I need business succession planning? The following questions will help you decide if you need business succession planning?
- If you die unexpectedly, can your family continue to run your business? If your family cannot run your business, who can?
- If you die unexpectedly, will your family have sufficient liquid resources to hire someone to replace you? If your family cannot run your business without you, you should consider their liquidity needs. If there is no money to hire someone to run the business, perhaps life insurance is needed.
- If you die unexpectedly, and have partners, will they pay your family a fair price for your business? When you are gone, you need a mechanism to ensure that your family is treated fairly by your partners.
- How do you protect your family in the event of your early death? The most effective form of protection for your family, or you, if you survive to retirement, is a well prepared buy sell agreement.
- How do you know if your buy sell agreement is well prepared? Does your buy sell agreement provide which events trigger the requirement that the remaining owners purchase the interest of the departing shareholder. These should include at least:
- Loss of a professional license
- Failure to properly carry out the owner’s expected duties
- Does is your buy sell agreement require the remaining owners to purchase the departing owner’s interest when a “triggering” event occurs? There are two fundamental types of buy sell agreements, voluntary agreements and mandatory agreements. A voluntary agreement means that at your death or retirement, your partners will negotiate the purchase of your interest from your estate or you. A mandatory agreement mandates that the remaining owners purchase your interest. The problem with a voluntary agreement, is that it is merely an agreement to agree and does not adequately protect you or your family.
- Is your buy sell agreement adequately funded? Every buy sell agreement should have provisions for the payment of the price of the departing owner’s interest by the remaining owners. The typical methods are:
- Installment sale based on the current earnings of the business
- A sinking fund whereby a certain amount of funds from the business are invested to provide for a future purchase
- Cash from borrowings at the date of purchase
- Life insurance - By far the safest method is the use of life insurance. The rest depend upon the financial solvency of the business or the other owners at the time that a purchase is mandated.
- By appraisal
- Book value
- A multiple of annual earnings
- Replacement cost of hard assets
- As agreed upon annually
- A loss of the family business to estate taxes
- A loss of the family business due to a lack of liquidity to tide the business through the period following an unexpected death
- A loss of the family business because there is no formalized arrangement to transfer
ownership of a decedent’s interest to the decedent’s heirs d. A loss of the family business because no one has been trained to replace the senior generation
- A loss of the family business because the retiring owners demand too much from the business to allow the junior generation to earn a reasonable income for their services
- A loss of the family business because sibling rivalry was not planned for
Flexible Tax Strategies Now Needed in Succession Planning for Business Owners
Minority interest discounts may no longer make sense for family businesses. Help your clients with a smart, flexible tax planning strategy for succession planning.Learn More
Business Succession Planning: How to Coordinate an ESOP Exit Strategy with an Estate Plan
In the right situation, an Employee Stock Ownership Plan (“ESOP”) can be an effective business succession planning tool for helping owners of closely-held businesses successfully exit the business while preserving the future viability of the business.Learn More
Succession Planning for Solos: Peace of Mind for Your Family, Opportunity for Your Practice
Succession planning offers clients peace of mind in the event of an attorneys death or incapacity.Learn More