How many small businesses can eventually rise to the level of
big corporations like IBM, Microsoft or Coca Cola? Very, very
few. Since very few people, who begin as mom-and-pop
operations, in a basement or a garage or in a dingy, dark office
with just one employee, are as smart, and can dream as big,
as the founders or these famous corporations did.
Once you dream big, then comes the numerous steps of hard work,
smarts and planning. US has millions of small businesses that
are said to be the back bone of our economy, and they form
the largest number of employers of people. Numerous
businesses open their doors everyday, while many others shut
theirs' all the time.
Even the most successful small businesses do not survive
after second or third generation of their founders.
Growing into a large corporation is rare, but putting up plans
to make a business survive even for a few generations is not
easy. Let us discuss the measures to help Business
Continuation or Succession, for small businesses, beyond the
life and time of their founders, so that future generations and
future owners may not have to invent the wheel again and again.
Protecting a business in the event of an untimely death and /
or disability of a major shareholder or key owner, should be
among the first concerns of any company. Proper planning for
contingencies for the financial security of the business ensures
future survival of the business. Corporations, Partnerships,
limited Liability Companies, Sole Propriatorships all need to
address Business Successions ASAP, as soon as possible.
The first step should be to contact the Advisors to your (own)
business. The attorney, the accountant and Financial Planner
can help develop succession strategies. The kind of business
entity is important. C-, S-, LL- corporations, are required for
perpetual existence of the business. Assemble your most
competent (key employees) staff and any family memeber who
will be responsible to run the business in your absence or
when the owner/founder is not available, due to death, sickness
or retirement.
Selling the business to a partner or associate or transferring
the ownership to a family member, has to be done very
carefully. Deciding Succession depends upon the competence,
interest and expected compensation of/to the Successor.
Prior to making any decision the business needs to be valued
of its worth. Multiple factors affect the value of a business and
its future worth to a buyer and/or an inheritor. Tax and business
valuation, as well as future projections are complex matters
and further insight from the Advisor(s) is/are required.
A buysell agreement between partners/owners is like a Will for
the business, which can be accomplished with a Cross-purchase-
redemption- or entity agreement. A wait-and-see clause can
also be added. Restricting the future ownership, minimization
of taxes, and limit the disruption of the business should be the
main concern in any such arrangement.
Strategies for estate conservation, setting up trusts, ILIT
(irrevocable life insurance trust). and gifting to charity and family
(heirs) can be accomplished with a cross- or entity-purchase
agreements, and stock redemption plans. A regular review of
the plans and keeping them current with tax and inheritance
laws should also be a part of the overall planning so that the
Succession may continue, at ease, in both favorable and
difficult times/circumstances.