Think Now About Business' Future

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Reprinted From: The News Journal
Written By: Nancy F. Blumberg, CPA-PFS, CFP
Planning for a family-owned business is a challenge.

Owners who wait for the right opportunity seldom do any planning. Several surveys indicate that fewer than 25% of business owners have a plan for transferring their business when they die or retire. Yet for most, their business is their most valuable financial asset and their family is their most valuable personal asset.

Business owners may not be willing to address their current situation realistically. Some put off planning until their children are more competent to run the business or until they develop an interest in it. They may want to wait until accumulated assets are available so children can be treated differently in allocating these assets.

Most business owners want to treat their children equally. They focus on dividing each asset into equal pieces, including the family business.

But equal is not necessarily fair and may not be in the best interest of the family members or the business. Those who supply what a business needs should not be bound to those who supply nothing. Incompetence and lack of harmony can destroy a business.

Several planning techniques are available to assist in dealing with the challenges of equalization. Children who are inactive in the family business or have no interest should be treated fairly, but differently than active children. This can be accomplished by creating assets outside the business.

For example, real estate can be kept separate from the family business and rented to the business. Inactive children may participate in the ownership of the real estate but not the business.

Business owners can also purchase life insurance to provide additional assets outside the business. Issuing preferred stock for inactive children is another alternative. This stock may have a preferred dividend return but may not give the stockholder a vote in the operation of the business.

Various plans can be considered that provide for the purchase of shares by active shareholders from the estate. This gives active shareholders an option to buy the business from inactive siblings. Only by addressing the issues can business owners achieve desired goals and objectives.