If you own a business, then you may want to start thinking about what will happen to your company when you make your exit in the future. It’s inevitable that somewhere in the forthcoming years you will no longer be able to control your business. When you have put so much hard work and time into making a company great, you don’t want to see that all fall by the wayside. According to a study in Small Business Review, only 30 percent of all businesses that are owned by a family survive the next generation. Sadder still, only 12 percent of businesses make it to the third generation and only 3 percent of businesses are functioning by the time that they hit the fourth generation. This sobering fact shows that if you want your business to last for generations, there is some serious planning involved.
In almost all cases where the business fails to sustain itself, the business owner is to blame. He or she never thought about what would happen to the company after he or she passed away, which is why the family business slowly disappears. If you plan for the future of your business ventures, then you will be in a better place to let them transfer to the next generation. There are a lot of different choices you must make, especially regarding who should take over the business in the event of your death. In many cases, people choose family members as their heir to the position of CEO. Fathers want sons to carry on in their footsteps, and may even try to integrate them into the family business from a young age to ensure that they will be capable of running the company someday.
Many business owners feel a certain pride in allowing their offspring to take over the family business someday, and others want to keep the integrity of their family name in the business by passing it down to the next generation. If you own a restaurant, you may want to keep secret recipes within the family, or a shop owner may want to guarantee that the name on the sign outside is the same name that you will meet when walking through the door. Sometimes, by allowing a child or another family member to take over your business, you will be able to obtain retirement income and transfer your business at a discounted rate. This may also allow you to save estate and gift taxes during the transfer and you may even be able to keep some control while you are still living.
If you don’t think that your family members would make the best business owners, then you may want to look at the business partners that you work with. You may be able to form a reciprocal buy/sell plan where if one of you is ready to retire or passes away the other one can automatically by his or her share of the business. These arrangements can often be paid for by life insurance, and guarantee that someone you trust will carry on the company in your stead in the future. If you don’t have a business partner or a family member suitable to take over your company, then you can target a hard-working and reliable employee. Some of your workers may be devoted to the company and dream of carrying on your legacy in this way.
You can use the Employee Stock Ownership Plan to arrange for your employee to own the company, yet you can still keep ownership until the day of your death. As well, you could consider handing over your business to a charity. This can be done with a charitable remainder trust. These trusts allow you to receive a lifetime income and the charity will obtain the proceeds of the company for their needs. The charitable trusts often bring in income, capital gain, and estate tax savings.
If none of these options sound like the right choice for you, there is always the option of an outright sale. While this is normally more expensive, it may be the best way to transfer your ownership of a company or business into good hands. Selling a business will probably come with high tax payments, so keep this in mind when you consider this choice. You will want to start thinking about who would take over your family-owned business now so that you can be prepared for the future and leave the legacy of your company without fear that it will fall apart when you are no longer here.