Transfer of Ownership to a Business-Active Child

All business owners will need to answer these three questions at some point:

1. What is my desired date of departure or exit?

2. How much $$$$ will I need for my goals and for life after the business?

3. To whom will I sell my business?

For many business owners, the preferred answer to the third question is a sale or transfer to my child, or children, that are active in the business. In such cases, the owner would have legacy or values-based goals that would be realized with a transfer of the business to their children. And, it’s not uncommon for these goals to be as important to the owner as their financial goals.

First steps in deciding if this is your best option for exit would include the following:

• Does my child want to be an owner? It can be surprising for an owner to discover that their business-active child has no desire to own “the family business”.

• Is my child capable or have the temperament for business ownership? Owning a business is quite different than having even a significant leadership role in the business. And, as parents, we can be very generous in the evaluation of our children so it is wise to obtain an expert assessment.

• Should my child pay for the business interest? Would I want them to pay for all or some of the business? Do I want them to experience the financial challenges that often occur in the early years of owning a business?

• Is minimizing the overall estate, gift, and income tax burden important to me?

• Am I concerned about the “fair distribution” of my entire estate to all my children including those not active in the business?

• How soon do I want to transfer meaningful ownership interest to my business-active child?

• Quantify available assets and resources to accomplish financial goals:

  • Estimate the value of the business.

  • Project future net cash flow of business available for planning.

  • Value and income from non-business assets.

  • Calculate any gap between the current value and what will be needed post-exit.

Following are the most common methods for transferring a business interest to a business-active child:

• Sale of stock

• Gift of stock

• Bonus of stock

Each of these methods has advantages and disadvantages, but a good place to start is having your Wealth and Tax Advisors conduct an analysis of the tax consequences of each scenario for your specific situation.

Please contact us if we can be of service to you in helping plan for a transfer of your business to your business-active child. Also, consider investing 15 minutes in our FREE exit readiness assessment.

Year End Action: Sole Owners Should Review Business Continuity Instructions

The end of each year is an ideal time for a sole business owner to review and update their Business Continuity Instructions. An owner’s death or permanent incapacity often leads to the failure of a business, resulting in very difficult consequences for the family, employees, and customers. Written and distributed Business Continuity Instructions will provide those left behind with essential short-term and long-term instructions regarding the continuance of the business.

Very practical short-term information needed on day one, such as…

• Bank account information

• Insurance coverage and location of policies

• Location of spare keys, security codes, and passwords

• Who has the authority to make immediate decisions? Operations? Finance? Administration? Etc.?

• What Key Advisors need to be contacted and engaged?

Long-term information about the continuance of the business, such as…

• Who comprises the Board of Directors (if applicable)?

• How do you want the business transferred? Sale to third-party? Sale to family? Sale to insiders? Liquidated?

• Do you have a current estate plan?

• Is there long-term debt and/or lines of credit that you’ve personally guaranteed?

• What are the sources of working capital during the time of transition?

• What agreements are in place with key employees? Employment Agreements? Stay Bonuses?

Having data like the above current and readily available for those left to continue the business could be the difference between the business continuing for as long as needed and being liquidated at a fire-sale price.

As we approach the end of this year and the start of 2022, we suggest investing time in creating or modifying your written instructions. Contact us today for a free copy of our Business Continuity Instructions fillable PDF.

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Year End Action: Sole Owners Should Review Business Continuity Instructions

The end of each year is an ideal time for a sole business owner to review and update their Business Continuity Instructions. An owner’s death or permanent incapacity often leads to the failure of a business, resulting in very difficult consequences for the family, employees, and customers. Written and distributed Business Continuity Instructions will provide those left behind with essential short-term and long-term instructions regarding the continuance of the business.

Very practical short-term information needed on day one, such as…

• Bank account information

• Insurance coverage and location of policies

• Location of spare keys, security codes, and passwords

• Who has the authority to make immediate decisions? Operations? Finance? Administration? Etc.?

• What Key Advisors need to be contacted and engaged?

Long-term information about the continuance of the business, such as…

• Who comprises the Board of Directors (if applicable)?

• How do you want the business transferred? Sale to third-party? Sale to family? Sale to insiders? Liquidated?

• Do you have a current estate plan?

• Is there long-term debt and/or lines of credit that you’ve personally guaranteed?

• What are the sources of working capital during the time of transition?

• What agreements are in place with key employees? Employment Agreements? Stay Bonuses?

Having data like the above current and readily available for those left to continue the business could be the difference between the business continuing for as long as needed and being liquidated at a fire-sale price.

As we approach the end of this year and the start of 2022, we suggest investing time in creating or modifying your written instructions. Contact us today for a free copy of our Business Continuity Instructions fillable PDF.

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Sole Ownership and Planning for The Unexpected

A sole owner of a business who has a spouse and/or family has not a few key planning issues that need to be addressed before it’s too late.  “Too late” being the unexpected events of death or permanent incapacity or disability.  To illustrate, let’s use the following story that is based on real life events…

John Doe owned a very successful commercial real estate development firm.  He regularly met with his Business Advisor and they “game planned” aggressive growth strategies that were proving to be successful in building the value of the business.  To the point where John was seriously considering expansion into other geographic areas.  Life was good and the business was growing rapidly!

One evening after meeting with his advisor, John experienced a sudden heart attack and died later in the hospital.  At age 55 he still had family financial responsibilities, yet he had not been as thorough in his personal and family financial planning as he had been in planning to build the business.  It was time of extreme grief and mourning as well as uncertainty for Jane…

• She didn’t know what to do next.

• She didn’t know if John’s salary would, or could, continue.

• Employees and customers started to leave as there was not a plan, and so the business became less valuable and sellable.  This was problematic as Jane was dependent on the sale value of the business as John had limited life insurance and investable assets.

• Due to the high level of uncertainty, there was a lack of peace and stability for Jane and for everyone who was at all dependent on the business.

There were too many things that John didn’t do, and should have been done, to mention in a short blog post. So, highlighted here are just a few (not an exhaustive list) of the key planning solutions that, if John had put in place, would have helped in minimizing the agony that Jane and the family experienced…

• Clear written instructions that were aligned with updated and adequate estate planning documents as to how to continue the business.

• A personal financial plan that included a cash flow analysis of how much money Jane would need both short-term and long-term in the event of John’s early death. 

• A written resolution for Jane to continue to receive John’s salary until insurance proceeds were received.

• Plans for the business bank line of credit to continue uninterrupted.

• A current and adequate personal life insurance program.

• Key person life insurance on John that would have provided needed liquidity for the business to provide key employee stay bonuses, etc.

Subscribe to our podcast (scroll to end of homepage) and get a complimentary copy of our Business Continuity Instructions fillable PDF .