If you own a small business, you’ve probably spent time thinking about what you want to happen to it in the future. You may hope to pass the business on to your children, transfer it to a business partner, or even sell it to a third party. Whatever your goal is, reaching it requires planning. Often, you need to start planning years in advance. For each of those three scenarios, here are some of the issues that you should be thinking about now to prepare for the transfer of your business in the future.
1. Passing the business to your children
If you hope to pass your business on to your children, you should first confirm that they even want it. They may be too busy with their own lives and be unwilling or unable to give your business the attention it needs to thrive. (Remember, a little communication goes a long way!) Assuming that your children do want to continue your business, you need to decide how to transfer it to them. One option would be to leave it in your living trust, allowing the trust agreement to dictate how the transfer will occur. But if your estate is large enough that the federal estate tax is a concern, it may be beneficial to transfer minority interests to your children while you’re still alive.
2. Transferring the business to a business partner
One of the best planning tools to prepare for the transfer of a business to a business partner is known as a buy-sell agreement. Buy-sell agreements are agreements that say that one partner will buy the other partner’s interest in the business when some specific event occurs, such as when the other partner dies. Of course, in that case, each partner needs to make sure that he or she has the funds necessary to purchase a deceased partner’s interest. A common method to fund a buy-out provision in buy-sell agreements is to use life insurance. The partners take out life insurance policies on each other’s lives. When the first partner dies, the remaining partner uses the proceeds from the life insurance to purchase the first partner’s interest from his or her estate (or trust).
3. Selling the business to a third party
If you’ve ever bought or sold a business, you know that it’s not as simple as listing it on eBay or Craigslist. It takes time to find an interested buyer who is willing to purchase your business. As importantly, it takes good records. A buyer will want to be able to confirm that your business is worth the asking price, so you’ll need to have the documentation to back that up. In other words, you’ll need to plan ahead of time so that you’re ready to sell when the opportunity arises.
You can see how planning plays a critical role in your small business’ future, whatever you hope that will be. Even selling a business, which is less like estate planning than the other scenarios I’ve discussed, requires planning long before the plan comes to fruition. To discuss how your small business affects your estate planning, please contact me, and I’ll be happy to talk to you more about it.