According to the Small Business Administration, 90% of the 21 million US businesses are family owned. Amazingly, less than one third of these companies will transfer successfully to the second generation, and only 15 percent will survive by the third. Why the low survival rate? Most of these businesses lack a succession plan, or an exit plan.
Exit planning is the process of ensuring the future success and continuity of your business after you retire. Your exit plan should address business, personal, financial, legal, and tax questions and includes contingencies for illness, burnout, divorce, and even your death. Ideally, your exit plan should maximize the value of your business at the time of exit, minimize the taxes paid, and position you and your family to achieve your future goals.
In one of the most compelling opportunities found in the down market, low valuations makes this an ideal time for family business owners interested in moving assets out of their estate to transfer ownership of their business to their heirs. For example, if your business was worth $8 million five years ago, but revenues are down 50 percent, consider selling 25 percent to a child. You could even provide financing for the transaction via an interfamily loan. Ten years from now when you are that much closer to retirement and the 25 percent you sold could well be back to being worth $2 million, you will be pleased with your foresight. Of course, you could also gift stock that has plummeted in value to your heirs. Advantageously, the tax consequences of your gift will be figured based on the fair market value of your company stock at the time you gift it.
Especially in today’s uncertain market and increasingly crowded marketplace, there is no substitute for getting a head start on your exit plan.