MMA Blog

Business Perpetuation: How to Transfer Business to the Next Generation

In our work with business clients across the country, one consistent theme emerges in our conversations with owners and leaders:

“How do we transition our business to the next generation or plan an exit strategy that maximizes our return for the time, blood, sweat, and tears we’ve poured into it?”

As we navigate through that conversation with our clients, several key themes drive the discussion:

What would happen to your business if you were no longer in the picture?

• How will your business operate when you retire?
• What will happen to the ownership of the business and personal assets?
• Would ownership be transferred? How and to whom?
• What would your business do in the event of a sudden death?
• Where would the money come from to pay business loans and cover ongoing expenses?
• Most importantly: which legal and financial arrangements do you have in place to manage this?

Just as it is important to cover your buildings, equipment, and vehicles, it is crucial to protect the assets you have worked so hard to build.

Planning for Business Continuation

What The Heirs Want
• Ongoing financial security after the loss or sale of the business.
• Prompt settlement of the owner’s business and/or estate, which includes proper tax valuation of the business and/or estate.
• Retention of the business interest by other current shareholders, which may be family members, or a prompt sale of the business to “outsiders” at an attractive price.

In The Absence Of Planning, Unhappy Consequences Can Result
• Conflicts and possibly even litigation between the remaining shareholders and the former owner’s heirs.
• Delays in the transition to successor ownership.
• Potential loss of customers, employees, and creditor confidence that can damage the business and possibly force its liquidation.

Advantages Of A Buy-Sell Agreement
A formal, written buy-sell agreement among the owners/heirs is the first step in assuring:
• An orderly and successful transition in business ownership.
• A fair price and terms reasonable to all parties.
• A set value for the business for state and estate tax purposes, which can help to avoid settlement delays and IRS challenges.
• Confidence in the ongoing vitality of the business in the eyes of customers, employees, and creditors.

Depletion Of An Estate By Taxes And Costs Due To The Death Of A Shareholder
The Estate Liquidity Problem
After a person dies, certain taxes and other costs must be paid in cash within a short period following the date of death. These taxes and costs will reduce the amount left for the business and heirs and may include such expenses as federal and state estate taxes, funeral expenses, expenses of the decedent’s last illness, debts, attorney’s fees, and court costs. In addition, if an estate/business is short of cash, they may be forced to sell assets at a loss in value, resulting in a reduction in wealth that is transferred. A comprehensive estate strategy, which includes having liquid cash available or through life insurance proceeds, is the most common way to pay for these expenses.

Avoid Probate With A Revocable Living Trust
A revocable living trust is a legal entity created by a grantor who wants to use the trust to receive assets and then distribute them according to the grantor’s wishes. Because the trust is revocable, the grantor may alter, amend, or revoke it at any time during his or her lifetime; however, the trust becomes irrevocable (terminates) at the grantor’s death.

A primary reason for establishing such a trust is to avoid probate on the assets that are transferred during the grantor’s lifetime. Distribution of the trust assets can remain private, unlike assets that go through probate, which is a record open to public inspection. One will need the help of an attorney well-versed in probate and estate work to establish such a trust.

Author Shaun McChesney is a Chartered Financial Consultant, Chartered Life Underwriter, and Certified Exit Planner through education at the American College. Reach out to Shaun to get started on ensuring a bright future for your business: [email protected]

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