Most businesses in the United States are small, closely-held or family owned companies. However, due to insufficient estate, insurance, and succession planning, many of these businesses do not survive through multiple generations. Small-business owners can find themselves preoccupied with the day-to-day workings of their business, but it is important that they talk to an attorney about different ways to plan for contingencies to maximize their opportunities for long-term success and survival.
SALE TO THIRD PARTY OR PURCHASE BY SURVIVING OWNERS
One of the most important parts of succession planning is accounting for ways to preserve the value of a business after the death of an owner. To safeguard a company’s value either upon sale to a third party, or purchase by surviving partners or shareholders, life insurance can be utilized to fund buy-sell agreements and provide “key man” coverage for essential personnel.
When the success of a business is dependent on an owner or other executive, it is advantageous to obtain “key man” insurance. With “key man” coverage, life insurance is payable to the company to support the replacement of the key person or to relieve any reduction in assets resulting from the loss of a major business generator. The business may purchase life insurance out of its existing cash flows. It then owns the policy and is the beneficiary of proceeds from the coverage.
The use of buy-sell agreements is especially important when businesses are run by co-owners. Individuals who share ownership should predetermine what the rights of each party will be upon death or disability of one of the owners to facilitate a smooth and amicable transfer. It is advisable to talk to an attorney about the ways to determine the purchase price for a deceased owner’s interest and how to effectively employ life insurance for funding a sale or buy out.
TRANSFERS TO THE NEXT GENERATION
Many closely-held businesses are also family owned. When this is the case, it is difficult, if not impossible, to draw the line where business considerations end and family ones begin. If a family owned business fails to engage in proper planning, business interests can pass to the wrong people, disagreements between family members over ownership and control may emerge, and business interests may even need to be sold off to pay for taxes.
Closely held business assets are subject to estate and inheritance taxes with payment time frames that close relatively soon after the death of an owner. There are many factors to consider in transferring the control of a family business. An attorney can guide you through the process of forming a comprehensive business succession plan that will allow you to take advantage of tax exemptions, plan for retirement, and generally work through the complex scheme of preserving assets while considering family interests.