NEWSLETTERS
Business Succession Planning: Business Owners: Have You Planned Your Exit?
You have worked hard building your business? However, have you thought about what will happen when you are no longer there running the show?
According to some studies, only 30% of all family-owned businesses survive to the next generation; only 12% make it to the third generation; and a meager 3% are functioning into the 4th generation and beyond.
Why is that? It’s because, most business owners do not plan for their exist, which can be voluntarily or otherwise. They do not do proper estate planning, which often results in unnecessary estate taxes that drain the life out of their businesses. And they do not plan for a successful transition to the next generation or other non family managers and/or employees.
Who could take over your business? It depends.
Family members are often a logical choice. Most business owners feel a certain pride in being able to pass down a family business. In fact, you may already have a child or two working in the business with you.
Depending on your financial needs, you can gift and/or or sell your business to family members. Some techniques will provide you with retirement income and let you transfer the business at a discount, saving estate and gift taxes. Most let you keep some control.
Be sure to consider family members who will not be involved with the business. Life insurance is often used to “equalize” inheritances. You also need to be objective when considering the abilities of family members whom you consider potential successors.
Business partners, managers or employees are also possibilities. One very strategic and effective means is to put a buy/sell agreement in place, so that when one of you is ready to retire or dies, the other(s) automatically buys his/her share of the business. Life insurance is often used to fund these arrangements.
Your employees could also be a source. For corporations, an Employee Stock Ownership Plan lets your employees enjoy the benefits of ownership, yet you can keep control until your retirement or death.
You can also involve a charity. Charitable trusts can result in good income to you along with capital gain and estate tax savings. With a charitable remainder trust, you can receive a lifetime income. And you have the added benefit of helping a charity that has special meaning to you. You can even establish your own Charity called a Private Foundation.
Lastly, you can also consider an outright sale to another company. But the tax benefits are usually not as good as other planning options unless you are selling corporate stock and personal goodwill. However, if your company is a corporation, you can engage in a tax free merger of your company into the corporate buyer of your company assets or stock.
A good business succession (exit) plan should also provide for the possibility of a long-term illness or disability. Work with an experienced legal and tax professional who can help you evaluate your goals and objectives, and can provide you with the best options for your situation.
About the Author
D. Steven Yahnian has been a member of the California Bar and a practicing Attorney since 1980. He has also been a California CPA since 1984. Mr. Yahnian also holds the CFP® designation.
Mr. Yahnian practices in the following areas of law through YAHNIAN LAW CORPORATION:
- Estate Planning & Administration
- Asset Protection Planning
- Tax Planning, Tax Debt Resolution and Tax Litigation
- Business & Corporate Law and Planning
- Real Property Law & Planning
As a CPA/CFP, Mr. Yahnian also has a separate accounting and tax return preparation practice called DSA ACCOUNTING.
Mr. Yahnian is a California State Bar Certified Specialist in the following
• Taxation Law and
• Estate Planning, Trust & Probate Law.
Mr. Yahnian received a B.S. degree in Accounting from USC, a J.D. from Loyola University of Los Angeles School of Law and an LL.M. in Taxation from New York University Law School. He also has a Certificate in Taxation from UCLA (with distinction). Mr. Yahnian also has an MS in Taxation* from UCLA (with Distinction).
*Equivalent
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