Small business owners must plan exit

Question: I own a business I started years ago. I let a few key employees buy into the business, but I still own most of it. I don't have children that will go into the business, so can I just leave the business to the key employees in my will? I really don't want the business to shut down due to inheritance taxes.

Answer: Your intent is charitable, honorable and kind. The only problem is, there's a pretty good chance it won't work.

If your entire estate exceeds the amount the federal government lets you pass on without estate taxes ($1,500,000 in 2005), your estate will be assessed taxes.

You may certainly leave the business to your present minority-owners, but that will in no way reduce your estate's tax burden.

Here's why: When you die, your estate's executor must file an estate tax return. It is his or her job to calculate the total value of your estate, report that to Uncle Sam and pay the appropriate level of taxes due.

The tax return and the taxes are due within nine months of the date of your death. And Uncle Sam has heard all sorts of sob stories, so the old, "We don't exactly have the money right now," won't work with him.

You can borrow money to pay the taxes. Or you may be able to pay on an IRS-approved "installment plan." But that won't save you any money. In fact, you'll just end up paying a huge tax bill plus interest.

One of the primary reasons small businesses often fail to pass from one generation to the next is the lack of a written and funded business continuation plan.

When you don't have a written agreement that acts as your business succession plan, you can have chaos at the death of the owner.

Think about what you want in your own situation: You want to get top dollar for your business. And why shouldn't you? In addition, you'd also like for the business to survive and your family to thrive, even after you are gone.

Byron R. Moore
February 20, 2005
Page Two

Unfortunately, the owners who survive you are almost forced into a different set of priorities: they want to pay as little as possible to you (or your heirs) for the business.

And while they'd love to see your family thrive after you are gone, they likely don't want to be in business with them. And what they really want to thrive is the business!

If you fail to write and fund some kind of succession plan, you could face any of the following problems:

1. A battle royal between the surviving family and the other business owners;
2. The inside of the courtroom; n A long (we're talking years) delay in the settlement of your estate;
3. The loss of customers for the business;
4. Possible sale of the business for pennies on the dollar to pay taxes.

I won't kid you...this is not going to be easy. But it is likely the biggest single financial decision you or your business will ever make.

Think of the biggest account, order or customer your business has ever garnered. Didn't you have to work long, hard and smart to gain that big fish?

Your business's succession plan is no less important. In fact, it'll be the biggest business deal of your life.

So what do you say? Roll up your sleeves and get to work!