Questions for business owners to consider when estate planning

There is a lot to think about when business owners begin estate planning.

As they think through what to do with what is often the most valuable asset in their estate, they’ll need to determine whether the company will be passed on or sold. In both cases, there are questions that need to be answered to ensure a smooth transition. Otherwise, owners risk devaluing their greatest asset, leaving little to their heirs.

“Regardless of whether the owner decides to maintain the business or sell it and divide the profits, the time to consider and lay plans is early on,” says Kimon P. Karas, a shareholder at McCarthy, Lebit, Crystal & Liffman Co., LPA. “Succession planning shouldn’t start at death or disability. That’s too late.”

Smart Business spoke with Karas about the many considerations business owners should make when determining their estate plan.

What are some of the questions family business owners should ask as they prepare their estate plan?
An early question is whether the owner wants the business to continue, or would rather cash out. Assuming that the owner wants to perpetuate the business within the family, he or she needs to determine how engaged the family is in the business and if they are able to manage and operate it.

It’s important to have a plan for the division of roles. In a situation in which there are multiple children and in-laws, delegation of duties and buy-in are critical.

Sometimes, however, there are children and in-laws who are fine not being in the business. The decision then is how to allow each family member to benefit equally from the business — those who are active in operations and those who aren’t.

How is planning affected when there is ownership or management outside of the family?
When a family business is owned in part by people who are not related, it is important for the owners to discuss early on the terms of that ownership. There should be buy-sell agreements in place as well as a succession plan. Have conversations about what happens if one of the owners would become disabled or die, or when or whether children from any of the owners’ families can join the business, and how ownership transfers as the current owners leave the business.

When the owner’s family is not capable of running the company or the non-family management doesn’t want to report to family members who are not actively involved in the business, ownership needs to take that into consideration.

The decision then is whether to sell the business or plan for the non-family management team to control the business. The owner could create a business advisory committee or trust comprising an accountant, lawyer and business consultants to oversee the company. Whatever is decided, the management team needs to be part of the conversation and comfortable with the decision.

What mistakes do business owners tend to make when it comes to estate planning?
The biggest obstacle is not making a decision. That can lead to conflict as the heirs are left to determine their roles and who deserves what share of the profits without the guidance of the owner.

In the case that the surviving members of the family realize that they can’t run the business and they need to sell, they will be selling from a position of weakness. Word will spread quickly and buyers will know what’s going on and why the company is being sold, and that will hurt the sale price.

Generally, business owners ought to be thinking about how to pass on their business when it becomes clear that the business is realizing steady, continued success and is becoming a significant part of the estate. At that point, collaborate with an accountant, attorney, financial adviser and family to create a plan.

Ultimately, whatever the owner decides shouldn’t be a surprise to the family — they should hear from the owner what roles each family member will have and how they’ll benefit from the business, if at all.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman Co. LPA