The Tale of Two Business Owners - Which One Are You?
As a business owner, you have unique financial, retirement, and estate planning needs. But with all the work you do running your company, you may have put off doing anything about them. If you don't have a plan in place for continuing your business once you step down, you may be placing the future of your business and your family's well-being in jeopardy.
Following are two hypothetical examples of family business owners, their different approaches to planning for the future, and the consequences of their actions.
After running his own business for most of his adult life, Sam decided he would retire in five years. He wanted his daughters, Lisa and Marion, to take over the business. He planned to spend the next five years helping them prepare for that task. Sam knew that few family-owned businesses survive the transition from first to second generation ownership. He was confident that his business would be one of the survivors.
With the help of his professional financial advisor, Sam organized his finances and developed a program to ensure the smooth transfer of ownership of his business. The program had four parts:
Once all family members agreed on the family and business plans, Sam focused on grooming Lisa and Marion to succeed him. Sam wanted his daughters to grow into their management roles over time and felt that the succession plan would help them. Sam could make any needed changes to the plan before he transferred control.
For business owners with doubts about their children's management ability, a family limited partnership (FLP) could be useful. An FLP enables business owners to transfer ownership to family members, but allows the owner to stay involved in day-to-day management.
Over the next several months, Sam:
By planning in advance, Sam was able to minimize estate and gift taxes, ensure the smooth transfer of his business to his daughters, and make sure that both he and his family were financially secure.
Dave paid little attention to succession, retirement, or estate planning, even though his construction firm had nearly 100 employees, $20 million in annual revenues, and enough upcoming projects to keep everyone busy for months. His children, Alan,
Steven, and Liz, worked in various positions within the family business and assumed they would run the company someday.When Dave died suddenly, the business almost died with him. Alan, Steven, and Liz were left with a huge estate tax bill and no idea where to get the money to pay it. While they were dealing with the IRS and trying to raise the money for estate taxes, they neglected the business. Deadlines were missed, costs skyrocketed, and key personnel left. Alan and Liz resented Steven for how little time he spent on the business and eventually forced him out. The family split into several camps, all hostile toward each other.
In the three years since Dave died, the business has seen its annual revenues plunge by half and its workforce decline by almost two thirds. The family is still bitterly divided. The outlook for the business is not good.
Which profile fits you? Many business owners fall somewhere in between Sam and Dave. If you're a business owner and have not yet addressed all your financial, retirement, and estate planning needs, there's no time like the present to get started. A little advance planning can go a long way toward helping provide a secure future for you, your family, and your business.
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