Business Succession Planning- Passing Your Business to the Next Generation, Part I: Advice from a Montana Business and Estate Planning Attorney
Montana is a place where family values are reflected in our business practices and many successful businesses are completely family owned. However, many small or family owned businesses do not have an adequate plan in place for passing on the business. Whether considering passing the family farm to the next generation or planning for retirement, business succession planning is essential to a smooth transition for your business and your family.
Today’s entry is the first part of a two part series on business succession planning, in which I will provide a brief overview of business succession planning. Part II will address some of the specific considerations relating to an unexpected death or incapacity, or retirement, in detail.
What is Business Succession Planning?
Essentially, business succession planning is long-term planning for the transfer of your business assets; either to the next generation or to other business partners. Business succession planning is the process of planning for the unexpected occurrences, or the “what ifs,” in business such as an unexpected death or retirement of a partner or manager. It allows the business, and its owners, to agree in advance to issues such as what consent is required to transfer business interests, to whom may an owner transfer business interest to, or how to determine the value of those interests.
The end goal of the business succession planning process is to have a solid agreement in writing that reflects the long-term strategy for the potential transfer of ownership in the business.
Why should you consider business succession planning?
Every business should consider business succession planning both at the initial start-up of the business, and periodically throughout the life of the business. Mainly business succession planning allows the business and owners to have more control of the unknown and unexpected that may come up with the business. Perhaps it is more important to consider what happens without business succession planning. Without it, the business may incur significant losses or the owners may even lose the business due to issues such as liquidity problems, family conflicts or tax issues.
Initial Considerations in Business Succession Planning.
First, if you have not already done so, consider a separate entity for your family or small business. A Limited Liability Company (LLC), Family Limited Partnership (FLP), or other corporate entity is an essential step in easing the transfer of your business to the next generation.
Next, review and discuss the long-term business goals with all of the owners, managers or officers; evaluate the current status of the business and where you want it to be in the future. The most important aspect of business succession planning is clear communication between all involved, which means the business partners, owners, managers, directors, and family members.
A major consideration in this process is deciding and agreeing on who will be the successors. Will it be family members, existing owners or third parties? Especially if you own a business with partners whom are not members of your family, it is essential to make clear, and agree upon issues such as whether or not you may transfer your interests to your children. If a transfer to your children is permissible, then discuss what role your children play in the business and whether or not additional training may be necessary.
In addition, it is important to consider the timeline for transferring interests. If the business owners have agreed to allow transfers to children or other family members, then determine whether or not transfers will take place all at once or incrementally over time. Within this timeline also discuss what training may be required, and how involved family members will be at each phase of the transfer.
During this process, always be mindful of estate and gift tax issues. Speak with your accountant or attorney to determine whether a sale of your business interests is preferable to a gift or bequest. Make sure you understand the tax implications for everyone involved.
Communication about these issues ahead of time will help to reduce conflicts in the event of unforeseen circumstances and ensure the business has the adequate resources to carry on into the future.
If you have questions about business succession planning, contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com