In our work with business clients across the country, one consistent theme emerges in conversations with owners and leaders:

“How do we transition our business to the next generation or plan an exit strategy that maximizes our return for the time, blood, sweat and tears we’ve poured into it?”

As we navigate through that conversation with our clients, several key themes drive the discussion:

• What would happen to your business if you were no longer in the picture?
• How will your business operate when you retire?
• What will happen to the ownership of the business and personal assets?
• Would ownership be transferred? How and to whom?
• What would your business do in the event of a sudden death?
• Where would the money come from to pay business loans and cover ongoing expenses?
• Most importantly, which legal and financial arrangements do you have in place to manage this?

But, just as it is important to cover your buildings, equipment and vehicles, it is crucial to protect the assets you have worked so hard to build.

Planning for Business Continuation 

What the Heirs Want

• Ongoing financial security after the loss or sale of the business. 
• Prompt settlement of the owner’s business and/or estate, which includes proper tax valuation of the business and/or estate.
• Retention of the business interest by other current shareholders, which may be family members or a prompt sale of the business to “outsiders” at an attractive price.

In the Absence of Planning, Unhappy Consequences Can Result

• Conflicts and possibly even litigation between the remaining shareholders and the former owner’s heirs.
• Delays in the transition to successor ownership.
• Potential loss of customers, employees and creditor confidence can damage the business and possibly force its liquidation.

Advantages of a Buy-Sell Agreement

A formal, written buy-sell agreement among the owners/heirs is the first step in assuring:

• An orderly and successful transition in business ownership.
• A fair price and terms reasonable to all parties.
• A set value for the business for state and estate tax purposes, which can help to avoid settlement delays and IRS challenges.
• Confidence in the ongoing vitality of the business in the eyes of customers, employees and creditors.

Depletion of an Estate By Taxes and Costs Due to the Death of a Shareholder

The Estate Liquidity Problem

After a person dies, certain taxes and other costs must be paid in cash within a short period following the date of death. These taxes and costs will reduce the amount left for the business and heirs and may include such expenses as federal and state estate taxes, funeral expenses, expenses of the decedent’s last illness, debts, attorney’s fees and court costs. In addition, if an estate/business is short of cash, it may be forced to sell assets at a loss in value, resulting in a reduction in the wealth that is transferred. A comprehensive estate strategy, which includes having liquid cash available or through life insurance proceeds, is the most common way to pay for these expenses.

Avoid Probate with a Revocable Living Trust

A revocable living trust is a legal entity created by a grantor who wants to use the trust to receive assets and then distribute them according to the grantor’s wishes. Because the trust is revocable, the grantor may alter, amend or revoke it at any time during his or her lifetime; however, the trust becomes irrevocable (terminates) at the grantor’s death.

A primary reason for establishing such a trust is to avoid probate on the assets that are transferred during the grantor’s lifetime. Distribution of the trust assets can remain private, unlike assets that go through probate, which is a record open to public inspection. One will need the help of an attorney well-versed in probate and estate work to establish such a trust.