From file "054_PSs" entitled "PSdisp11.qxd" page 01
From file "054_PSs" entitled "PSdisp11.qxd" page 01

Construction supply businesses are often family-owned and operated. Unfortunately, many such owners fail to plan for business succession, resulting in more than two-thirds of family-owned businesses failing to make it to the second generation and only about 10% continuing to the third.

To keep your business strong through management transitions such as the founder retiring or dying, or other unstable events, or to determine whether to keep your business in the family or sell to an outside party, proper and careful business succession planning becomes essential. A business succession plan is a comprehensive look at the estate-planning picture that can include everything from shareholder buy-sell agreements to management plans and documentation that will help ensure the smooth transfer of business operations. While traditional estate plans are designed with tax minimization in mind, business succession planning, in addition to such considerations, is aimed at maintaining the future health of the business.

Because the family-owned business typically is a substantial asset, an owner must address a number of estate planning issues that will affect the future stability of the company. These include estate equalization for active and inactive family members that will fairly compensate them, the overall liquidity of the estate, and the successful continuation or transition of the business.

A business succession plan, which might consist of a buy-sell agreement or carefully crafted will provisions, can address these issues and other potential problems by providing answers to the following questions:

  • Do I want my business to be a lasting legacy for me? How do I preserve the financial health of my family business, as well as the social and economic well-being of my family?
  • Who has the authority to continue operating the company?
  • Will the company be sold, liquidated, or continued?
  • Who are the potential buyers and do they have the cash to effect the purchase in a timely fashion?

To promote continued operation of a sole proprietorship, the owner might leave instructions for management of the business following death. These directions might provide some guidance to a successor proprietor such as a spouse or child who might need assistance during the transition period. Since the successor would, however, own all of the business assets and have full control of business operations, the successor could choose not to follow such guidance.
In some instances, a sole proprietor may be able to simplify the transfer of the business at death by converting it to a corporation under state law while alive. Since a corporation has continuity of life, many of the issues confronting a sole proprietor at death can be avoided. Nevertheless, it would still be important for there to be competent management in place to succeed the decedent, and to have a buy/sell plan in place to govern the transfer of his or her shares.

Typically, an owner's death or disability can create an array of financial problems affecting both the business and the owner's family. For instance, estate taxes, loss of income, or a buyer having adequate cash to purchase the deceased or disabled owner's shares are problems that cannot be entirely avoided by a succession plan. For this reason, life insurance and disability income insurance go hand-in-hand with business succession planning.

Left: Joseph Morris Jr., Senior Associate, Creative Financial Group, Newtown Square, Pa. Right: Dave Gibbs, Senior Associate, Creative Financial Group, Newtown Square, Pa.

A team consisting of your lawyer, accountant, and financial representative can help you develop your business succession strategy, including all the necessary documents and information. There are established methods for transition that can help leave both your business and successor management free from unnecessary worry or jeopardy. In addition, through life and disability insurance coverage, the transition can be properly funded to help avoid substantial losses that might otherwise occur. —Creative Financial Group is a full-service fee-based financial planning firm specializing in areas such as business succession strategies, asset protection and tax savings techniques, retirement planning, executive compensation strategies, and employee benefits.

The information contained in this article is not intended to (and cannot) be used by anyone to avoid IRS penalties. This article supports the promotion and marketing of life insurance. You should seek advice based on your particular circumstances from an independent tax advisor.