Business succession is the process of transferring a business from one owner to another. Many business owners want to pass down a family business to future generations. Unfortunately, many do not succeed due to the many unforeseen challenges that come with business succession and the complexities involved. Consulting financial and legal experts about the complex issues that come with transferring business assets can greatly improve the chances for future business success.
Common Business Succession Issues
Transferring a family business can present unique challenges. Many businesses fail due to lack of capital, lack of planning, and numerous other issues that can arise unexpectedly. Careful planning can help families who want to transfer their business ownership to family members to avoid many of the problems that cause failure. Documentation of a clear plan is a proven way to help family businesses thrive for generations to come.
One of the first steps that business owners should take is to evaluate the governing documents that are already in place for the business. Documents of incorporation, personnel records, tax documents, contracts, accounting records, licenses, and any other paperwork that could affect the ownership or operation of the business should be collected with copies kept in a secure location.
Business valuation is an important part of planning for business succession. The value of a business includes tangible assets such as real estate where the business is located and any supplies as well as intangible assets that may be more difficult to evaluate, such as goodwill of the business and any intellectual property like copyrights. Consulting with business valuation experts to obtain an appraisal of business assets may be useful for some business owners.
Choosing Future Owners
Transferring business assets to family members can trigger discord among family members. It is important to consider what arrangements you have made for family members who are not active in the business, as well as who will be most suited for the role of taking on the responsibilities of managing business operations.
When choosing who will run a business in the future, it is important to consider their preparedness as well as how the business will be funded. Many businesses fail after succession due to lack of support and lack of funding. Many families are unprepared for the complexities that come with business succession, which is why it is important to consult an attorney with business succession experience.
Many family businesses do not survive due to problems with cash flow and taxes. It is essential to understand how estate taxes may affect the business when planning a business transfer. Planning for how the taxes will be paid by future owners can make all the difference in whether or not future business owners will succeed.
Coordination of Financial and Estate Plans
It is important to consider how an estate plan can be coordinated to increase the chances for success of a business. An important question to consider is how the business will be funded. Proceeds from life insurance policies and funds directed from a will or trust may be essential for paying business debts and providing the cash needed to sustain a family business.
A buy-sell agreement involving a business is one that serves to transfer business assets to a new owner upon a triggering event such as the death, disability, or retirement of a current business owner. Buy-sell agreements can be used to transfer many different types of corporations. Buy-sell agreements can also help establish a value for the business for estate tax purposes.
Entity Buy-Sell Agreements
An entity buy-sell agreement involves an agreement between a separate business entity that agrees to purchase an existing business.
Cross-Purchase Buy-Sell Agreements
A cross-purchase buy-sell agreement is one that involves existing business owners purchasing the ownership interests of other owners.
Wait-and-See Buy-Sell Agreements
A wait-and-see buy-sell agreement gives potential owners an option to purchase a business when it is time for a new owner to take over the business.
Buy-sell agreements may be able to help business successors with the uncertainty that comes with taking over a business by including provisions about how the business will be funded. Having a clear plan in place can reduce the uncertainty that causes many businesses to fail after a change in ownership. An attorney with experience in this area can help families create a clear plan to help manage many of the complexities that come with business succession.
Contact a Business Succession Attorney
If you have questions about business succession planning, contact attorney Nina Whitehurst at Cumberland Legacy Law online to schedule a consultation, or call (931) 250-8585 to reach our home office in Crossville, Tennessee.