Posting by Joel C. Susco, CPA, Principal

Succession planning is inextricably linked to estate planning in a family business.  We’re always looking for specific family-related business issues, but this one can’t be hit home too often – your family business needs a succession plan, sooner rather than later, for a variety of very important reasons and with many options to consider.

Will the Business Stay in the Family or be Sold?

If you want this to stay in the family, you’ll need to identify appropriate and willing successors, and not just assume this will happen smoothly.  If there are partners, that needs to be taken into consideration.  If selling, does the business need some work to make it ready for sale?  Will you remain as a consultant, or will you have enough proceeds for your retirement plans?

How Does Estate Plan Handle Children in and out of the Business?

Not all family members want to be in the family business.  Disputes over equity often occur during the distribution of the estate.  It is wise to first consider how family employees may be handled differently from family non-employees, to reflect what you want each to have (no one says it has to be equally distributed, but be prepared for the kids to do the math – they will even if you do not).

What About Key Employees?

You might want to protect those key employees who helped you from the start, but the successor may fire them immediately.  You’ll want to make provisions for them if this is important to you, including possible ownership stake, buy-ins, inclusion in management.

Does the Business Need to be Reorganized?

What once worked as a sole proprietorship may need to become an LLC, which may need to become a corporation.  You may want to keep some control and retain preferred stock that allow you to be paid dividends first – a corporation structure would allow this.

Is a Buy-Sell Agreement Needed, and How is It Funded?

If your family business has one or more co-owners (e.g., your spouse, a sibling), you’ll need a buy-sell agreement to account for what happens in the case of your retirement, or death/disability.  Do you want to offer right of first refusal for purchase of your share to anyone specifically?  A price needs to be set, so an appraisal may be necessary.  In your business structure, the sale would also need to be funded, by life or disability insurance on the owners.

No doubt about it – these questions may be daunting and may trigger even more questions, but their consideration may be what separates the business from another failed company statistic.

– See more at: http://dcfamilybusiness.com/we-cant-hear-this-enough-succession-and-estate-planning-for-your-family-business/#sthash.QfKzW7RR.dpuf