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The Importance of Succession Planning in Small Businesses

By Douglas H. Flint

Published in the January, 2017 issue of the Cherokee Tribune

The backbone of the American economy is small business. Most small businesses in the U.S. are family- owned and many have been in existence for decades. One of the most challenging tasks I have faced in my career as a business lawyer has been developing strategies to help families arrange for the transfer of their business to others — be it a child, another family member, or another party, to ensure the survival and continuity of the business. This short article will touch on some of the main issues that a lawyer and his/her client should consider.

Family business owners typically seek to set up an orderly and affordable succession of the business when they decide to step back from the responsibilities of the day-to-day management of its operations; however, they also have a keen interest in ensuring that the business will continue to provide for the needs of themselves and their spouse in order to keep them comfortable during their retirement years. Failure to properly plan for a smooth succession during the owner's lifetime can lead to extraordinary costs, monetary losses, and even loss of the business itself. In the past, experts have determined that over 70 percent of family-owned businesses do not survive the transition from founder to second generation ownership. In my experience, given proper planning with ideas in advance of what is desired, a business succession plan may usually be put in place that minimizes expense and trouble, often to the mutual benefit and profit of everyone involved.

There are five primary considerations that anyone planning a family business succession should take into account:

First, determine the business owner's long-term goals and objectives for the family business. Sometimes continuation of the business does not make sense or is not attractive to others in the family. The business may very well have a greater value to the owner and his/her family if it is sold instead to an outside party.

Second, determine the financial needs of the business owner and his/her spouse, and develop a viable plan that ensures their financial security. The reason that a business owner toils his/her whole life to build up a business is to support themselves and their family, so transitioning to another owner should not defeat this purpose.

Third, decide who will manage the business and develop a management team. It is important to remember that management of a business and ownership of the business are not necessarily the same. Responsibility for the day-to-day management of the business may be placed in one particular child or relative, or even an outsider, while ownership of the business may be left to a group of children, a trust, a combination of relatives, or sometimes even loyal employees. Regardless of its composition, it is not necessary that the ownership group be active in the business.

Fourth, determine who will actually own the business in the future and decide how to transfer the business to those individuals. Such a transfer may be accomplished by a gift, sale, bequest, or other means, and many factors, including but not limited to the tax consequences resulting from a particular type of transfer, will influence the decision. This decision may be further complicated where only some of the owner's children are active in the business (such that he/she prefers to vest ownership in those children alone), but the owner may lack sufficient assets outside of the business to enable him/her to leave an equal share of their estate to each child without including an ownership interest in the business. A business succession plan must therefore provide a way to transfer wealth to the children who are not involved in the business. Business owners should also determine the most effective means of transferring ownership and the most appropriate time for the transfer to occur. In this process, the business owner must decide if he/she will continue to control the business after the transfer of ownership is complete and also whether he/she will continue to receive economic benefits from the business after the transfer of ownership (this will depend on the resources of the business and the financial needs of the business owner and his/her spouse).

Fifth, minimize transfer taxes associated with the business transfer and ensure that the owner has an appropriate estate plan. Estate taxes alone can claim up to 40 percent of the value of the business which can often result in a business having to liquidate or to take on debt just to stay in business! To avoid a forced liquidation or the need to incur debt to pay estate taxes, there are many legal strategies that may be put in place by the business owner to minimize or eliminate estate taxes. If there is any good news concerning taxes, it is this: In 2014, the State of Georgia abolished all estate taxes; therefore, the only taxes that Georgia business owners currently need concern themselves with are federal estate taxes.

If you own a business and are thinking about the future of it, talk to your lawyer before it's too late.

Douglas H. Flint is a partner at Flint, Connolly & Walker, LLP where he assists clients, both individuals and businesses, in a range of legal matters affecting business and real estate in litigation as well as out of court. 
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