When exiting your family business, you will need to decide whether to sell your company to an outside party or have your family take it over. If you choose to keep the business in the family, you have to consider the issues that will effect the success or failure of your plans. There are personality and control issues to take into account, as well as the need for income, and family dynamics. In order to have a lucrative transition, you must have open communication, adequate planning, and insight.
Opposing needs and principles
The specific needs of businesses, as opposed to families, are often different. They will ultimately affect the company, as family roles and individual values come into play. For example, does the business use excess cash flow to enter new markets or to help fund an ownership transition? also, it is often hard to look past family relationships, and consider your heirs as employees.
A valuable method is to form a family council that creates plans for both family and business goals. Having an official exit plan can lessen the stress of the transition process, and prepare the next generation for taking over the business. Furthermore, estate planning is crucial for both the family and the organization to ensure that the funds go to your children, and not to taxes.
Who am I when I am no longer a business owner?
Identity issues can also become an issue when transferring a company across generations. The older generation may have a hard time determining their identities, after relinquishing control of the company. Also, the younger generation may develop identity issues as they gain company-operating control. For example, personal issues can arise as the successors seek to prove their capabilities. The senior family members may have a hard time viewing their children as capable adults. In essence, it is mostly the nature of a parent to have difficulties in realizing that their children can effectively run the business.
Will I be able to retain financial independence?
Another issue relative to a business exit is to decide how the owner of the company can retire comfortably. There are certain retirement plans that are tailored to the specific needs of entrepreneurs. If you have not yet looked at your retirement choices, now is a good time to make a plan.
You could set up a deferred compensation plan while you are still working. With this strategy, you can receive income while working. However, a percentage of your salary would be withheld until you retire or exit from the company. Other possibilities are financing simplified employee pensions, IRAs, simplified IRAs, or 401(k) plans.
If you are intending to retire in the near future, another possible method could be to sell your business to your family. If you choose to have your heirs purchase the company, there are specific financing policies such as private annuities, installment sales, and self-cancelling installment notes (SCINs) that can provide youincome over a certain period of time. Although less typical, you could establish a lump-sum payout, which you could put away for your retirement.
Assets for a living partner
Another critical issue to think about is to secure adequate funds for your spouse when you die. If you have made your source of revenue from the company, you should consider what your partner would get when you die and your children control the company. There are numerous strategies to use, including life insurance or buy-out contracts that assure a smooth transfer of your business to family members. You can also arrange to have your partner receive revenue from the business sale. However, most establishments cannot continue to pay wages to the spouse upon the holder's death.
How will estate expenses be paid for?
If you die and still own the company, there could be a need for funds to pay estate taxes and final expenses. If you are incorporated, your business may be allowed to sell back shares of stock that are equal to your estate taxes and any final expenses, according to a 302 stock redemption.
It becomes clear that family business succession is a complex process. But, by addressing the issues with a holistic approach you will greatly increase your chances for good outcome.
Opposing needs and principles
The specific needs of businesses, as opposed to families, are often different. They will ultimately affect the company, as family roles and individual values come into play. For example, does the business use excess cash flow to enter new markets or to help fund an ownership transition? also, it is often hard to look past family relationships, and consider your heirs as employees.
A valuable method is to form a family council that creates plans for both family and business goals. Having an official exit plan can lessen the stress of the transition process, and prepare the next generation for taking over the business. Furthermore, estate planning is crucial for both the family and the organization to ensure that the funds go to your children, and not to taxes.
Who am I when I am no longer a business owner?
Identity issues can also become an issue when transferring a company across generations. The older generation may have a hard time determining their identities, after relinquishing control of the company. Also, the younger generation may develop identity issues as they gain company-operating control. For example, personal issues can arise as the successors seek to prove their capabilities. The senior family members may have a hard time viewing their children as capable adults. In essence, it is mostly the nature of a parent to have difficulties in realizing that their children can effectively run the business.
Will I be able to retain financial independence?
Another issue relative to a business exit is to decide how the owner of the company can retire comfortably. There are certain retirement plans that are tailored to the specific needs of entrepreneurs. If you have not yet looked at your retirement choices, now is a good time to make a plan.
You could set up a deferred compensation plan while you are still working. With this strategy, you can receive income while working. However, a percentage of your salary would be withheld until you retire or exit from the company. Other possibilities are financing simplified employee pensions, IRAs, simplified IRAs, or 401(k) plans.
If you are intending to retire in the near future, another possible method could be to sell your business to your family. If you choose to have your heirs purchase the company, there are specific financing policies such as private annuities, installment sales, and self-cancelling installment notes (SCINs) that can provide youincome over a certain period of time. Although less typical, you could establish a lump-sum payout, which you could put away for your retirement.
Assets for a living partner
Another critical issue to think about is to secure adequate funds for your spouse when you die. If you have made your source of revenue from the company, you should consider what your partner would get when you die and your children control the company. There are numerous strategies to use, including life insurance or buy-out contracts that assure a smooth transfer of your business to family members. You can also arrange to have your partner receive revenue from the business sale. However, most establishments cannot continue to pay wages to the spouse upon the holder's death.
How will estate expenses be paid for?
If you die and still own the company, there could be a need for funds to pay estate taxes and final expenses. If you are incorporated, your business may be allowed to sell back shares of stock that are equal to your estate taxes and any final expenses, according to a 302 stock redemption.
It becomes clear that family business succession is a complex process. But, by addressing the issues with a holistic approach you will greatly increase your chances for good outcome.
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