Estate Planning for Business Owners

If you’re a business owner, you probably have plenty on your plate just meeting each day’s challenges, but you’d be well advised to do some longer-range planning. About 70 percent of family-owned businesses fail to make a successful transition into the second generation. About 90 percent fail to be successfully transferred to a third generation of family members. These statistics reveal both the difficulty of transferring from one generation to the next and the lack of planning for successorship.

Small business owners have a host of special needs. Who will take over the business after you die? Do the surviving spouse or the children get control of the stock? Which ones run the company, and which merely share in the profits?

This article will look at some of the issues that you and your lawyer should discuss if you want the business to continue after your death. In a later article, we’ll look at some of the issues involved in selling your interest in the business and the best way to transfer ownership to the new owners.

Before you meet with a lawyer to plan your estate (and the legal issues involved here are so touchy that a lawyer’s expertise is essential), you should sit down with your beneficiaries to try to answer some critical questions, including how the business will be operated in the immediate aftermath of your death.

Continuing the Business

Customers, bankers, suppliers, competitors, and predators are all very interested in what will happen with a business immediately after the death of the owner and president. What’s worse, the death of the owner may bring on some serious crises. Loan documents, franchise agreements, and other legal contracts often contain termination or re-negotiation clauses in the event of the death of the majority or sole business owner. The uncertainty following your death may also mean the business loses key customers or distributorships, which will make it difficult to sell the business for an optimal price. There is no worse time for the business to re-negotiate financing or defend its opportunity to continue a favorable franchise or distributorship relationship. But if you plan well in advance, you can prevent some of this chaos.

When renewing contracts with franchisers and suppliers, ask for a modification of any clauses stating that the contract be terminated or re-negotiated upon the death of the owner. Perhaps you could amend them to specify re-negotiation three months after the death of the owner, to give your business a chance to get over the hump. You should specify your successors in any distribution agreements.. Some distributorship agreements require pre-approved successors, in effect forcing you to plan for your succession. There is no guarantee that franchisers and suppliers will agree to these changes, but you’ll never know unless you try, and the time to try is now.

Control

Any prospective buyer will want to see a business that’s running smoothly. Make sure that the new leaders specified in your plan for succession are specifically granted authority to make decisions concerning the business immediately after your death or disability. The issue of control should be addressed through a will, living trust, or other appropriate legal document. Appoint one or more competent, experienced individuals or entities to make business decisions.

Continuing Family Ownership

If you want the business to continue in the family, your plan should provide a legacy for children and future generations after your death or disability. At the same time, it must adequately address financial needs of a surviving spouse. It must also provide for the fair distribution of estate assets among children and other family members. Will one or more children receive ownership interests in the business to the exclusion of other children? How do you compare value of an illiquid business interest with cash or marketable securities? Should one child receive a controlling interest in the business or, alternatively, should it be shared among several children? If one child receives the business, how will that affect that child’s total share of the estate? Is that child’s share of the remainder of the estate adjusted? What is the impact of these decisions on family relationships?

Only you and your family can answer these questions. As always, communication is the key—be sure you involve your family in these decisions so you know their concerns and they know your evolving thinking. If your beneficiaries are interested in taking over the business and, in your judgment, possess the expertise to do so, it’s relatively simple to transfer your interest directly to them. If stock is involved, you might want to leave voting stock to the children who will be involved in operating the business and leave nonvoting stock to the others. Or you can leave the child who will be running the business enough cash (perhaps through life insurance proceeds) to enable him or her to buy out the rest of the estate, and thus avoid conflicts. If you have any questions concerning estate planning or the transfer of a business, call Burns & Associates at 1-(732) 596-1999.