Brian M. Johnson, MBA, CLTC
Are you a business owner or manager in a business? Yes? Then ask yourself: If you, a key manager or top sales person retired, became disabled or died yesterday, who would own or manage your business today? Would you want your business interest sold, liquated or retained by a family member or other key employee?
Do you have a partner in your business? Could the business continue without him/her? Would you want to be in business with your now deceased partner’s spouse?
These are critical issues to address sooner than later. Unlike corporations with hundreds or thousands of employees, with layers of management, small business owners and key employees often play a paramount role in the day-to-day success of that business. As a business owner, you probably know what it’s like to be responsible for budgeting and hiring, while also running out to shovel the sidewalk in front of your office or store. In many cases, YOU are that business.
Lets look at three objectives, with corresponding questions, you might consider in developing a continuation plan.
Objective: Retain the business interest for family.
Is there a willing and capable family member? Will that family member be acceptable to any other owners or partners? How will you or your surviving dependents replace the income your business interest provided?
Is there a need to equalize inheritance between family members? For example, do you have one child in your business, and two other children pursuing different careers? Will there be enough liquidity in your estate to pay taxes and other settlement costs?
Objective: Sell the business.
To whom will your business be sold? At what price? And at what events? Retirement, death or disability? What is the value of your business interest? Will the funds be available at your retirement, death or disability?
Objective: Liquidate the business interest.
What is the value of your business as a going concern? How does that value compare to the liquidation value of your business? How will you or your surviving dependents replace the income previously provided by your interest? Will there be sufficient funds available to allow for a planned liquidation?
No matter what your objective might be, there are basic steps that can be taken now that will help you put a plan in place that will answer the aforementioned questions. The continuation plan certainly starts with the owner talking to his/her family members and key personnel to get an understanding of their individual finances, aspirations and skill sets. These conversations will provide a framework for the continuation plan.
First and foremost, a business valuation should be conducted for a myriad of reasons. For estate planning purposes, the value of the business interest may have a substantial impact on any estate taxes payable at the owner’s death. In addition, the value of the business in relation to other estate assets can determine whether a deceased owner’s estate is eligible for certain tax relief provisions, such as Section 303.
Finally, a business valuation that meets certain requirements may fix the value of the business for federal estate tax purposes.
For business continuation planning purposes, it is important to be able to determine the price at which a closely-held business interest will be sold at an owner’s death, disability or retirement.
The owners of closely-held businesses who plan to gift all or a portion of their ownership interests must know the value for gift tax purposes.
A realistic business valuation can assist in obtaining additional business loans.
Knowing the value of the business can be helpful in justifying to the IRS the reasonableness of compensation paid to owner-employees.
Second, a financial and tax plan, legal documents and insurance need to be put in place. Understanding what income you’ll need in retirement is of utmost importance. A financial advisor can help establish a plan for accumulating assets, conserving them and then plan for distribution at death.
Your accountant should be consulted for valuing the business and then working to minimize any business or estate shrinkage due to taxes. Your attorney needs to be included in equation for estate planning purposes.
Many Americans fail to execute basic advance directives such as wills, health care proxies, power of attorneys and/or trusts. These documents allow you to remain in control of your business and estate, even if you’re not there or unable to make decisions due to an illness or injury.
For businesses with two or more shareholders,