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Succession planning: What happens to your business when you die?

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I have a business that is five years old, so I’ve graduated from “start-up” it seems. I am the sole owner and do not have any partners. What happens to my business when I die? Can it continue, or does it just shut its doors?

One of the biggest key failures of business owners is the avoidance of succession planning. Likely for this reason, 80 percent of businesses do not pass successfully to the second generation.

Succession planning is estate planning for your business in an orderly fashion. Most business owners are the cook, the window washer, the janitor, and the gatekeeper. They are the ones who pay the bills and keep the trains running on time. What if something happens to you? All of your staff depends on you. What would happen if you became disabled or die? Or your co-owner? You need to ask and answer the questions that arise in unintended, unfortunate consequences to ensure that the fate of your business is what you would have wanted, the same as your grandmother’s pearls or your family photos or your bank accounts.

Whether you have a million-plus businesses or a side-hustle, you should contemplate these questions. A good place to start is what you want to do with your business when you retire. If you are not going to retire, what if something happens to you, and you are disabled and depend on the business for your income? Whether you want to retire, or if you pass away, do you want the business to be continued by future generations of your heirs? Would you consider passing on ownership of the business to them now? And, if you want it to be given to them at your death, are they involved in the business enough to know how to pick up operations and ensure a smooth transition? Similarly, if you do not have a family member in place, do you have a key employee to groom as a successor?

Often, one or more children sticks around to help mom or dad with the family business. Also often, mom and dad have other children who are not contributing efforts to the business. Frequently, mom and dad’s business forms the most valuable asset in their estate. Some questions that arise are whether dad wants to continue to operate (or can operate) the business without mom if she becomes sick or dies? How do mom and dad provide an inheritance for the non-involved children while allowing the working child to continue with the business? Is it fair to allow the non-involved children to receive the benefit of the involved child’s labors? Conversely, is it fair to effectively disinherit the non-involved children by leaving the business to the working child? This scenario can often cause friction at family holidays.

Most people take the “ostrich” approach — that is, to stick their heads in the sand rather than tackle these difficult questions (or admit their own mortality). Yet, a little advance planning can go a long way in this regard. The first step is to separate the concepts of the “equity” from the “working” interest, just as the owner’s equity interest is separate from the income interest. The working child is entitled to a salary commensurate with his labors, one that she or he would have earned doing the same job for another company. Put another way, the salary is the amount the company would need to pay another individual to perform that child’s job responsibilities.

To the victor go the spoils, and to the equity owners go the profits. While the non-involved siblings may not be “tilling the soil,” so to speak, they are still “investors” in the sense that their inheritance is their capital contribution. By shifting the thinking toward this model, there is less room for resentment and more willingness to share the fruits of the business, as in any other investment in the open or closed market.

The importance of being forward thinking on succession planning cannot be stressed enough. Successful business owners are good at making decisions big and small. This is just another aspect of those decisions that can ensure that the fruits of your labors continue long into the future.

Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., where she assists new and not-so-new parents with their estate-planning needs. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find Alison Besunder on Twitter @estatetrustplan and on her website at www.besunderlaw.com. If you have a question that you would like to see answered in this column, please email alison@besunderlaw.com.

Updated 5:06 pm, July 9, 2018
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