How to Leave Your Business to the Next Generation

January 2021 Newsletter | By: Ian Sachs, CFP®
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transition paths, Risk Resource article

Planning for the future of your family business by addressing your retirement, illness, or death is essential. These life changes will not only impact your family, but also the families that depend upon your business. Here are some important things to consider when planning for a transition of business ownership to the next generation:

  • Pick just one child to be the owner, or at least, the person in charge of running the company. The person you choose should have the most ability and interest in running the business. If you have more than one child, you can use other assets to make sure that all of your kids are treated equally. Life insurance is a popular way to accomplish this.
  • Consider having this successor buy the business and have a properly drafted buy-sell agreement in place.
  • Put a non-family member in an upper-level management position and consider giving that person a small piece of ownership in the business. This often will help circumvent any conflict that may arise.
  • Often, business owners want to leave their businesses to their surviving spouses upon their deaths, but this option should be thoroughly considered. When a spouse dies, ownership will pass onto the children equally, but there can be problems with this approach. The surviving spouse may not have any interest in running the business, and putting children into a joint ownership arrangement can be a recipe for disaster.
  • If transitioning the business to your children is not the most attractive option, consider selling the business. You can use the proceeds to help your children buy into or start a business of their own.

Give thought to how you want to pass on your business to the next generation so that if an unforeseen situation does arise, a plan is in place and ready to be implemented. Or even better, you can exit the business one day on your terms.