As small business owners it is not always comfortable to think about what will happen to your business when you want to retire or move on. It is never too early to be thinking about your business succession plans.
Some business owners plan to hand over their business to one or more of their children. A number of issues need to be considered.
Scenario One… Mum & Dad and Tom & Nicole
Scenario: Mum and Dad had their Wills done a few years ago, leaving everything equally to their four children.
What’s the issue? Two of their four children have been working in the business over the last few years and they would like to give them the opportunity to take it over.
Solution: Mum and Dad can have their Wills drafted so that Tom and Nicole have an option to take the business as part of their inheritance. The Wills give them the opportunity to decline at the time and, if so, it will be sold and the proceeds distributed as part of the total estate.
Scenario Two… We prefer to retire now…
Scenario: Mum and Dad want to retire and do some travelling. They prefer to hand the business over now.
What’s the issue? They would like to keep the business in the family, but can’t afford to just give it to the children. Tom and Nicole can’t afford to pay up-front for it.
Solution: An agreement can be drawn up to give equity to Tom and Nicole in return for payments over time from the cashflow of the business. Of course, an Exit Agreement and a Buy Sell Agreement with insurance funding, should also be considered by Tom and Nicole.
Scenario Three… not enough
Scenario: When Mum and Dad die, Tom and Nicole still owe more than what they are entitled to from the estate.
What’s the issue? Tom and Nicole can inherit the business, but there is not enough in the estate to compensate the other two children.
Solution: The agreement is drafted so that Tom and Nicole continue to pay for the business over time, with the payments now directed to the estate. This will be done until their siblings, Matt and Amanda, receive the equivalent of their estate share. Alternatively, life insurance could cover the difference.