Your business may be thriving; it may even be your whole world, but it won’t always have you to steer the ship.
Planning for an eventual transfer of ownership of your business when you “retire” is not something to leave for your later years at the company. Manning Elliott LLP partner Abbe Chivers, CPA, CA, a wealth and estate tax adviser, says it is never too early to prepare your business for transition.
“I don’t think you’re ever too young to have a plan.… I’ve seen many different situations that were avoided because someone thought ahead, and I’ve also seen what happens when you don’t,” Chivers said.
Family business transition planning
One of the most important things when planning for a transfer of your business interests is to determine whether someone in your family wants to get involved in your business. Quite often, that is not the case, said Chivers.
“If they are interested, you need to bring them into the business at an early enough stage so that they can learn all the things that you know intuitively.”
Waiting until the year before you retire to prepare a family member to take over your business can often mean the business’ health is not maintained after you leave. It might take some time for the family member to decide if they want to be the manager and owner, or maybe just the owner.
“Even if they just want to be an owner, they’re still going to be responsible so they still need to learn how the business operates,” Chivers said.
Children of business owners who are preparing to take over must spend time working in the business and ensuring they have a good team in place that will be able to continue what the parent or parents worked so hard for.
Meanwhile, those retiring need to figure out whether they wish to continue being involved in their business after they retire, whether they want to be a co-owner or leave the business entirely.
Protecting the business
Chivers had a client whose business was very productive and profitable, and whose kids did work in the business.
“The owner had some health issues but was quite slow in putting things in place so that his kids would be ready to take over.”
Then the owner died suddenly.
“I had to convey the information that he provided to me to his kids, as to how he wanted the business to be transitioned.”
The client’s wife inherited the business shares but had not been significantly involved in the operations. She had to rely on her kids and their knowledge of how things operated. Chivers says this is not an ideal situation for business owners and their families.
If it turns out that no family members are interested in running the business, or have an in-depth knowledge of the operations, they typically decide to sell, which may result in the family receiving a less than ideal price for the company.
Preparing your business partners
It is imperative that, when there is more than one owner of a business, there is a shareholders’ agreement from the very beginning, said Chivers.
“Say partners are happy to do business together.… Everything’s lovely until something happens. Either somebody gets sick or somebody dies, and there is no written plan as to what’s supposed to happen with that partner’s shares.”
A shareholders’ agreement should outline what happens in the event of illness or death, as well as other events. It lays out if heirs of the deceased are to take over that share of the business, or if the remaining partner can buy the estate’s shares. Maybe the agreement states that if that is not an option, then the deceased shareholder’s beneficiaries can buy out the remaining shareholder. There is also the plan whereby the company is just sold, if there is no agreement between the two parties.
Partners should also sort out life insurance in the early days of the business. If a partner dies, the company will receive the life insurance payout, which can often then be paid out from the company on a tax-free basis. The intention would be that the partner that is still alive would use that money to buy the estate’s shares.
Chivers also suggested partners consider buying critical illness insurance so that if someone gets sick suddenly, there is money available to continue running the business.
If you have a plan for these vital areas, you can rest easy knowing your business will be taken care of, said Chivers .
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