You may want to keep your business in the family, as opposed to selling it to an outside party or another business. If this is your plan, you should be aware of some of the issues that can contribute to the success or the failure of the business as it is transferred to the successor generation. Some of the issues revolve around personality and control, while others have to do with your potential need for future income and the demands it can place on the business. Insight, planning, and open discussion can contribute to the successful transfer and continuation of the family business.

Emotional issues–Family succession

Conflicting needs and values

Families and businesses commonly have conflicting needs and values. These conflicting needs often overlap in a family business, as family roles and perceptions come into play inside the business. It can sometimes be hard to look beyond the family relationships and see the strengths of a family member as an employee. It is important for the continued success of your family business that family issues and business issues are kept separate. One tool that has been found to be useful is the formation of a family council to establish plans for both business and family goals. Formal succession plans can be used to ease concerns about transferring ownership and to prepare the successors for their new roles. In addition, estate planning is critical for both the family and the business to ensure that the estate goes primarily to your heirs and not to pay taxes.

Identity issues

There can be identity issues that arise as the business is passed from one generation to the next. The senior generation may be trying to determine whom and what they will be after they leave control of the company. The successor generation may be trying to determine whom they will be and how they will take over the company. There can be personal issues as the younger members attempt to be taken seriously by other family members. It may be hard for family members to realize that the family member who was such a troublesome adolescent has now settled down. It can also be hard for the parents to realize that the children are capable of making sound business decisions.

One way to help ease these issues is to engage in early training of those family members who participate in the business.

Income & liquidity planning

Retirement income planning

There are retirement planning options unique to business owners. If you have not already engaged in retirement planning for yourself, you might want to do so now. Arrangements can be made for deferred compensation while you are still working. With deferred compensation, you would receive a raise in salary while working but not actually receive the cash until your retirement or withdrawal from the company. If you are ready to retire now and don’t have an outside plan, you may still have some options. If you plan to sell the business to your successor family members, financing arrangements such as installment sales, private annuities, and self-canceling installment notes (SCINs) can provide you with income over a period of time. A lump-sum payment can provide you with an amount of cash that you can invest. If you intend to pass the business to your heirs through your will or trust at your death, you may want to consider retirement options such as IRAs, simplified IRAs, simplified employee pension plans, or some of the other retirement plans available.

Income for surviving spouse

A major area of concern may be income for your spouse when you die. If you have derived your living from your business, what will your spouse do when you die and it passes to your heirs? There are various options available that include the use of life insurance or buy-sell agreements to facilitate the sale of the business interest to family members. Your spouse could receive money from the sale of your business. One thing to remember, however, is that generally the business can’t continue to pay out your salary to your spouse if you have died.

 

Payment of final expenses

If you die while still active in your business, there might be a need for cash to pay your final expenses and estate taxes. If the business is a corporation, your family or estate may be able to sell back an amount of stock equal to your estate taxes and final expenses under a Section 303 stock redemption. You should consult a tax advisor as certain specific conditions apply to such a stock redemption.