There is no doubt that working in a family business can be rewarding, but it might also come with some challenges. With regard to succession planning in particular, here are some of the top tips you need to consider when multiple relatives are coming to the same table on a family business.
(Photo Credit: perthnow.com.au)
- Make clear goals and objectives. Getting everyone on the same page with where the business “is” and where it’s “headed” is not easy, but you can bring things full circle by thinking about common goals and visions.
- Create a process for making decisions: Don’t rely on the way you have always done it as a family. You may need more formal structure and written explanations of how decisions are to be made. Don’t forget to factor in your methods for resolving disputes. This can save you time and hassle in the future.
- Generate a comprehensive succession plan that determines active and non-active roles for family members, establishes successors, and determine if additional support for that successor will be required from other family members. Documenting everyone’s role makes it easier.
- Have both a business and owner estate plan. Don’t forget one or the other, as they are both important in a family business. Think about minimizing taxes and protecting assets together.
- Determine the most appropriate avenue for transition. There are numerous options for buyouts or agreements, and this is something you definitely want to discuss with an attorney.
To learn more about how we can help clients with proper succession planning for a family business, call us at 732-521-9455 or send an email to firstname.lastname@example.org.
Are you planning to keep the Family Business “in the family”? Did you know that family businesses now make up as much as 50 percent of the gross domestic product of the entire country? We’re not just talking about small storefronts or website companies, either. Over one-third of Fortune 500 companies are controlled by families in some sense. It’s critical that as a small business owner, you plan ahead for the future with a succession plan. Here are some of the most common issues facing small business owners with a family connection.
(Photo Credit: merchantcircle.com)
- Align your family interests: As members begin to retire or hand off control to other generations, the interest alignment of these individuals becomes all the more important.
- Generational transitions: Think about the future, because only one third of all family businesses actually end up passing the business on to the second generation. You might want to have alternative plans.
- Interfamily disputes have the potential to dominate family-owned businesses especially when perception of needs is not lined up between key players. This becomes even more complicated when there is a death or divorce involved.
- Retirement income: A buyout agreement doesn’t have to be complex, but it is harder to do with a family business because retiring individuals might be more focused on a balance sheet rather than an earnings capitalization model.
- Estate and inheritance issues: While individual planning is important, there should also be plans in place that relate to the business.
All of these issues are just a sample of concerns for those involved in a family business. Contact our office today to learn more about our Business Succession Planning practice. Email email@example.com or contact us via phone at 732-521-9455 to get started.
A buy-sell agreement needs to be written properly in order to ensure that it’s effective for invested parties. There are some specific aspects that should be considered in the planning of any buy-sell agreement. Here are some of the basic stipulations:
(Photo Credit: yoursmartmoneymoves.com)
- The commitment of involved parties. The obligations of each party should be outlined clearly, leaving no room for questions
- The purpose of the arrangement should also be specified
- A formula explaining the purchase price of the business interest should also be included, like a value for the selling/buying price for the business. Furthermore, how this should be funded is also explained.
- Any transfer restrictions should also be included, which can prevent the owners from transferring interest in the business while any other parties to the agreement are still alive.
Bear in mind that there are tax considerations for funding a buy-sell agreement with life insurance, such as:
- Premiums used to fund the agreement are generally not tax deductible
- There’s no gift tax that happens on the buy-sell agreement execution
- In a cross purchase agreement, the cash value of the policies that are owned by the decedent can be factored into the decedent’s estate.
- Death proceeds are paid out income-tax free, no matter who actually owns the policy.
If you’re planning on structuring such an agreement, you might use an entity purchase agreement, a cross purchase agreement, or a hybrid agreement. To learn what will work best in your situation, send us an email at firstname.lastname@example.org or contact us via phone at 732-521-9455.
A captive insurance company is a company created by a business owner to help insure risks of affiliated businesses. When set up appropriately, a captive allows a business to manage risks while allowing the affiliated company to reap benefits, too.
(Photo Credit: business2community.com)
A Captive will receive premiums that are then invested as opposed to premiums sent to a traditional unrelated insurer, which are essentially “lost”. Over time, those premiums accumulate. In the event of a risk loss, the premiums are available to be paid for those self-insured losses, thus protecting the business’s bottom line. This crucial benefit is the biggest advantage for business owners.
A Captive can issue casualty or property insurance to protect against a broad array of risks. Where the business owner has the most potential to capitalize on this opportunity is through risk protection for those risks that are typically too expensive to coverage or uninsurable, period. With possible major tax increases coming in the future, the Captive Insurance company remains situated as one of the most effective solutions for business owners. Captive Insurance benefits go beyond tax advantages by providing business owners with opportunities in wealth transfer, estate planning, and asset protection, too.
At Shah and Associates, we work with you individually to determine how a Captive can best suit your business needs. With vast experience in the field, we have helped our clients use Captives to minimize taxes, protect assets, manage risks, and improve cash flow. We understand the peace of mind and confidence that comes from a comprehensive approach to risk management, and that’s why we remain committed to the business community.
While “now” is always the time you should start getting your exit plan ready for your business, there are some guidelines about specific year marks that you should use to think about what will happen next. Here is the best advice for exit plans.
(Photo Credit: theretiredaffiliate.com)
Starting ten years in advance is the best way to maximize opportunities. This is because at this marker, you can start really considering whether the business is intended as a family legacy. If a family member will be taking over the business, the ten year period is a great planning point for incorporating those family members into training and education. Ultimately, this will make the transition period much smoother. Saving taxes is another primary concern at this stage. If a business owner has recently converted the company from C Corp to S Corp filing status, you should wait a minimum of ten years before selling the company.
Five years out is a good place to review because you are a little closer to the finish line here. Cash flow, tax deduction, and tax leverage should all be explored with your planning specialist at this time. Changes regarding cash flow can allow for a strategy in which cash flow to the owner is a focus rather than company growth.
Finally, even one year out provides planning opportunities. For example, we have implemented strategies which could save the Seller the entire [9% – 13%] tax some states collect upon the sale of a business. If the company will be sold, the owner should identify a business broker or investment banker to actually put the business on the market. This gives enough time for a due diligence review, drafting the sales agreement, and delays related to regulatory issues. No matter what stage you’re at, you need to put some planning tactics in place for your exit plan. Contact us today at 732-521-9455 or email email@example.com to get started with your personalized plan.
Owning and operating your own business is an exciting venture, but it can present you with challenges when you are unwilling or unable to continue managing the business. If you are considering passing the company on to your children or grandchildren, make sure you put some time into the planning process so that the transition is as smooth as possible.
(Photo Credit: Darlingonlinemarketing.com)
The best recommendation for succession planning is to start five years in advance of when you might need an exit strategy. Many people make the mistake of assuming that they will only need to consider this need later in life. With rising numbers of people impacted by a disability, succession planning is something you should consider early. Getting the planning done well in advance gives you room to alter your plan if needed. Throughout this process, keep your family members engaged in the conversation so that relevant individuals understand their role.
While you have many options as a business owner, you should consider the talent of your children and grandchildren in order to decide how they might fit into the bigger picture. It’s critical that you are realistic about this decision. While it’s important for whoever takes over for you to have the passion and interest in running the business, you should also evaluate business skill and potential in making your decision. If you have several children, it may not be feasible for them to each own an equal portion of the company. In this circumstance, you should plan to transfer the whole business to a child who wants to follow you as the owner. Other assets can then be transferred to other children. This may be the most effective move for your business and future family harmony, too.
Plan For Existing Employees
Unless you are the sole person managing a company, it’s likely you have a team behind you. Make sure you have considered what will happen to these employees after you go as well. Will then be incorporated into the transition phase? Are there key employees who could help your children understand the big picture and smaller operational issues as well? Remember that in the event of a major disruption in a company such as the departure of a longtime leader, key employees may not want to stay. Having a conversation with them about your succession plans, as well as providing incentives for them to stay, may be in your best interest. Keeping valuable and knowledgeable employees on the team after you leave will make the transition easier for all and is less likely to cause financial issues for your business.
Train and Document
Once you have decided the best approach for your planning, train those individuals that will play a role at the time of your departure. Keep them clued in to vital issues. Remember that it’s much easier to update your succession planning once it has been documented. Working with an experience estate planning attorney will give you confidence and peace of mind about your decision.
Captive insurance companies are private insurers that are owned by a parent company. Although a captive insurance company has some of the same benefits of a regular insurance company, captives collect the premiums that a company would have paid over to a regular insurer while taking the responsibility for any claims against the parent company. Captive insurance companies are uniquely situated for certain situations.
(Photo Credit: saveourpostoffice.com)
Manage Risk and Protect Assets
Many businesses have particular needs for risk management because the risk it outside the typical market. In that case, insurance either can’t be purchased or the price is so high that the company is forced to self-insure. In still other cases, the business might have insurance for some risks, but that comes at a cost of premiums and deductibles. This is just the type of risk that sits well with a captive insurance company. Typical general liability insurance seems like a “coverall”, but in reality there are so many exclusions that a business still stands exposed to high risk. That’s where insurance from a captive company can help by filling in the gaps from those exclusions.
Every dollar spent by the company and sent to the captive serves as a $1 reduction in operating business assets. In the event that the business collapses, the company is not at risk of losing those dollars that have been transferred out of company property and over to the captive insurance company. Captive insurance companies are known for accumulating high amounts of assets through reserves and surplus. In certain disaster situations, some of those funds may be available for a business owner. Although a business owner might face some tax consequences of doing so, you can think of those funds as an emergency fund that could be there if you need it. It’s an extra layer of protection that can give a business owner peace of mind.
Exert More Control
Captive insurance companies typically create customized policies for the needs of each specific business. Unlike many commercial policies, policies through captives have the added benefit of drafting the policy in a manner that makes it virtually impossible for third-party claims against the business from being approved. The individualized nature of policies means that protection is aligned directly with business needs rather than generally accepted amounts and terms.
Going through a commercial carrier has another downside: you give up the option to select your own attorney. Defense counsel connected with insurance companies often handle large volumes of cases, taking away that personalized attention for your case. The fact that these counsel handle upwards of 200 cases each year from referrals also calls into question whether that attorney is looking out for your best interests- or the hand that feeds them. Since insurance companies that hire counsel are budget-minded, you also don’t know the quality of attorney you’ll be receiving through the appointment process. With captive insurance carriers, business owners control the captive and therefore maintain control over selection of an attorney.
From a business owner perspective, these few advantages represent big benefits. Guard yourself against risks, protect existing and growing assets, and exercise more control over how things are handle by working with a captive.