Transferring the Business to the Next Generation: 7 Initial Questions to Ask Yourself to Start the Process

By: Attorney James A. Spella, Schloemer Law Firm, S.C. and Attorney Amanda N. Follett, Schloemer Law Firm, S.C.

If you are considering transferring your business to the next generation, you need to read this before you start.  Without a well-thought out plan, a succession plan can fail – which can have disastrous consequences for both the business and the family. The business can lose value, employees can be driven out, parents may lose the opportunity to sell to an outside party, children may become shackled with debt in a business in an obsolete industry, litigation may ensue, and—worst of all—family relationships may be irretrievably broken.

Transferring the business to the next generation may have been on your mind for some time, or recent global or economic events may have you starting to think about accelerating your retirement plan.  If you are considering transferring the business to the next generation now or in the future, you should start considering the details of how that process will work, as it will take time to come up with a well-thought out plan to ensure a smooth and successful transition.

Asking yourself certain critical questions before you broach the topic with children can help prepare you for the conversation.  Then, having an open and honest conversation with stakeholders early in the process is important.  A qualified and experienced attorney or advisor can help facilitate the discussions.  Our office will often meet with clients, along with their accountant or other advisors, to help guide a family through the process.

To start the discussion, there are a few questions we recommend asking yourself, and then discussing with your advisors and key stakeholders:

  1. Is it your intent to transfer ownership to family members (and the complications that type of transfer entails), or should a sale to a third party be the initial planning objective? A third-party sale simplifies retirement planning for the owners and simplifies estate distribution at death.
  2. A succession plan is a process of thoughtful planning—what is your current ‘default’ plan as evidenced by your estate plan?
  • If you are “hit by the bus” tomorrow, what happens to your business?
  • Until a succession plan is in place, have you empowered trusted individual(s) to act on your behalf during a period of lifetime incapacity?
  1. Do you have a recent fair market valuation of your business?
  • What is the business worth if you pursue a third party sale?
  • What is the business worth if you sell/gift to the next generation?
  1. If it is your intent to transfer ownership to family members, should all family members be considered successors?
  • Should only those who are currently involved in the business be considered successors?
  • Have any family members indicated an interest in being a successor? If so, are they currently employed in the business or outside the business?
  • Have any family members indicated no interest in being a successor?
  • Even if family members have shown an interest in being successor owners, are they qualified to do so?
  1. Does the business provide—or have the prospects of providing—adequate cash flow for the current owners (retirement security) along with the cash flow needs of one or more successor owners?
  2. Are you or your spouse insurable to provide death benefit assets to address an equitable distribution to family members not part of the succession plan?
  • Note: Many times, succession plans utilize techniques including gifts to the successors not provided nonparticipating family members.
  1. Do you view your succession plan as a transfer of the business to qualified successors, or is it your intent to create a legacy succession plan (multiple generations)?

NEXT STEPS

Once you ask yourself these questions, if you still decide to transfer the business to the next generation, the next step is to form a written agreement to memorialize the plan.  Next month, we will cover 13 Questions to Discuss with your Children to Avoid a Failed Succession Plan.

If you have any questions, would like to begin the discussion, or can’t wait for next month’s blog, please contact this article’s authors, Attorney James A. Spella or Amanda N. Follett, or one of our estate planning attorneys.

Originally published: September 10, 2020.

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Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action.  If you need legal guidance, please contact us at 262-334-3471 or [email protected]