Family business: Legacy or tragedy?

Question: I own my own business. Several years ago my son came into the business. One day I would like for him to own it. Is it better to try to sell it to him now, or just leave it to him in my will?

Answer: If your business is successful, good for you.

Unfortunately, most small businesses are worth more to the present owner than to the next guy. Once you factor in salary, perks and tax breaks, a successful business is generally more valuable to the owner if he keeps it than for the price he would fetch selling it.

Many business owners actually find themselves unable to retire from their "successful" business. They are successful alright, but all their success has been plowed back into their company. They have no retirement plans, real estate or other investments that will provide income in retirement.

That's one reason you see so many business owners continuing to work so late in life. The other reason is that they genuinely love what they do.

Consider the plight of a 70-year-old business owner and his 45-year-old son. Dad brought Junior into the business twenty years ago. Junior has had a very positive impact on the company. In fact, he is now the president and in charge of all the day-to-day operations of the business.

Dad is so confident in Junior that he spends about half his time at his condo in Florida, becoming reacquainted with his inner-teenager. Junior's public stand on this is, "Dad deserves it. He's worked all these years and it is now time for him to relax."

Privately, however, Junior has additional thoughts. He knows that the more the business grows, the more "expensive" it will become for him to either buy or inherit. And Dad is still taking money out of the business each month to cover his expenses, but Junior worries that the IRS might not regard Dad as a full-time employee. What if they decided to treat Dad's monthly checks as "doubly taxable" dividend distributions? Ouch.

Dad and Junior would do well to sit down with their financial and estate planning team and hash out a few issues:

What happens when Dad dies? Does Mom take over? (Or, in some cases, a second wife). Wills and life insurance policies become very important issues at this point.

What is this business really worth? Don't just use the so-called "book value" that you may carry on your financial statements. Has a Certified Valuation Analyst given you an appraisal that would stand up in tax court?

Do you have a funded buy-sell agreement? Once you know how much the business is really worth, you can make arrangements to codify that in a buy-sell agreement. In most cases, you will want to make sure the funding for the sale is available by having life insurance back up the buy-sell agreement.

Have you had your wills and other legal documents updated? The best of intentions can be thwarted by an outdated will.

Has the entire family been brought into the process? Most family owned businesses have some children in the business and some that are not. Unless you want to plant a time bomb, now is the time to address issues of perceived "fairness" to each family member.

Is your plan in writing? If you cannot put your plan into written words (plain English, please), you do not have a plan - you have a dream. Go the final step of putting your family business's succession plans into writing. Putting thoughts into writing has a way of clarifying otherwise murky ideas.

Most entrepreneurs are accustomed to independent, bold decision making.

But when it comes to passing on the torch of your family's business, take your time, involve everyone in the process, be thorough and (try to) be fair.

It could mean the difference between leaving behind legacy or a tragedy.