Where there”™s a will, there”™s a way to plan for your business to continue once you”™ve decided to retire. And while death may come to us all, most hope retirement ”“ and a long and happy one ”“ comes first.
“For many, it”™s a decision put off for several reasons,” said Robert Levine, partner at the law firm of Cuddy & Feder. “Who will inherit? What if children do not want to stay involved in the business, but do not want the loss of income? If there are no children, do you sell to a longtime employee or become an ESOP, employee stock ownership plan?”
Are the financial ramifications worth the wait? “Definitely not,” Levine said. “It may be easy to put off making a succession plan to prevent squabbling, but imagine what can happen if the owners aren”™t there to mend fences if disaster strikes?”
Lawyers, accountants and financial planners agree a succession plan is a must, even if it might seem comparable to a root canal without anesthesia. “Clients can purchase life insurance equal to the amount the business is worth if they plan to leave that business to a single child but have other children,” said attorney Mark Krohn of Jacobowitz & Gubits. “For the child who wants to take over so the parents can retire, parents can ”˜gift”™ stock to children a little each year based upon the gift tax rules in effect; in return, the parents receive an annuity. There are a hundred different ways to plan. Each situation is unique.
“When no one in the family is interested in continuing, the owner may want to find someone who is strongly committed and would be interested in buying it, creating an annuity so the transition can be made. Another option is to sell outright and advertise in a trade journal.
“If there is a sudden death or catastrophe within the family ”“ there are some provisions the Internal Revenue Service that provide relief to the successors,” Krohn said. “The provisions are designed to let the taxes be paid in installments over a period of time, but you must prove the business is at least fifty percent of the entire estate.” Yes, it can be a muddle ”“ along with the hard feelings that can accompany it as those left behind try to decide who deserves more ”“ or less.”
“People have to decide what they want to do with a family business,” said Ita Rahilly of Vanacore, DeBenedictis, DiGovanni & Weddell.
“It”™s not unusual to find one or a few of the children interested in carrying on the family name. For those that aren”™t, it must be decided what to do for those who are and those who are not; if all family members are interested in continuing, how will the business be transitioned?
“If the business generates enough income to buy out their parents and let them retire, that is the ideal situation. Depending on the type of business, the parents can hold the note, children receive compensation and then pay parents for their share of the business. For those who want to go in another direction, they would get a cash or loan receivable.
“There”™s a big difference between selling your business to your child as opposed to gifting it. When you sell, you get something in return. If it is structured correctly, other children will not be at a loss. Because each situation is unique, it may be something that is easy to put off, but for your family”™s sake, don”™t leave them behind to figure out who will do what.”
Attorney Robert Heiferman of Jackson Lewis L.L.P. could not agree more. “Regardless of the business, a succession plan is frequently omitted. The majority of small businesses make no provision. Even if there is a partnership agreement, they are often bereft of facilitating it. Every business, whether a closely held company, a small business operation or a partnership, it should have a plan in place, tailored to suit the situation.
“Families and generations that succeed to the business when it is not prepared for can create some extremely hard feelings among the people left behind. In a partnership agreement, will there be a mandatory retirement? If not, it may hold a younger person back from advancing into a position that would help move the company ahead. That”™s just an example of what can happen if people don”™t sit down and work things out beforehand.”
Cuddy & Feder is putting together a financial seminar in Fishkill in November, bringing together a financial adviser, an attorney, an accountant and a tax specialist to answer questions.
“This is a decision no one wants to make,” said Levine, “but for the sake of their business, particularly if it is branded and known, it is the way to ensure it will move successfully to the next generation.”
