Estate and Succession Planning for Small Business Owners
Who’s the best person available for the job? For most business owners, that is a question that comes up dozens of times a year. And it is the most important question in planning for what will happen to your business if you can no longer operate it, or are not living.
- If I am unable to run my business, should I continue to own it, and if so, who will run it?
- If I die, who should own the business and who should run it?
If you cannot continue to work in the business, or even oversee it, the first question is whether you should continue to own it. Many businesses produce income that is much greater than the income which could be received by selling and investing the proceeds. On the other hand, no one else will run the business the way you do, and there is a risk that as time goes on the business will produce less income and be less valuable.
The second question, and the two questions are related, is, if you continue to own it, who will operate it? If you have absolutely no candidate, you should probably sell, particularly if you will not be able to oversee the operation. If you have a perfect candidate, that is you continue to receive enough income and the operator receives enough income to keep him interested, you can keep the business. It’s when you have some decent candidates but are not sure whether they can handle it that the decision becomes more complicated. The one absolute I can tell you is never have someone operating your business whom you do not completely trust.
The situation changes when you are not living, and changes more if you have a spouse who is not involved in the business who survives you and will be dependent on the income. Should your family continue to own the business? Will it produce enough income to compensate for the risk? Remember, most businesses can be sold after death with no capital gain tax, so there is more money to invest.
And who can operate the business after your death is different. Can your spouse oversee the investment? If you put one child in charge, will she think that she is working for her mother and siblings for the next 20 years, and will they think she is receiving a huge salary for a job they could easily do? Will the trusted employee who would work extra for you and never consider cheating you feel the same way about your wife and children?
There may be no right answer. And the right answer for you now might not be the right answer later. But periodically think about these issues and communicate your current thinking to your family and your advisors. Don’t make them guess.
To further discuss estate planning for small businesses, please contact David Heilich, Partner in Charge, Family Wealth Planning Group, at 314.983.1273 or firstname.lastname@example.org.