Common Estate Planning Questions: How to Pass a Business on to the Next Generation

For a lot of business owners, their exit plans involve leaving their company to their children and grandchildren. But passing on your business to the next generation can be a lot more complicated than bequeathing the balance of a retirement account or Grandma’s diamond engagement ring.

At PAX Financial Group, we work with a lot of business owners, and how to go about leaving a business to a second – and even third – generation is one of the most common estate planning questions we get.

Unfortunately, it’s not as simple as just handing the keys over to your children on Friday afternoon and letting them open up shop as the new owners on Monday morning. There are issues to consider, like tax implications, buy-sell agreements and other personal, family and legal matters.

The numbers are sobering when it comes to the likelihood of a business’ continued success when passed from one generation of family ownership to the next: Recent studies suggest only about 19 percent of family-owned businesses will survive the transition from founder to second generation. Of those, 12 percent will make it to the third generation. The reasons for such sad statistics are many, ranging from kids or grandkids whose hearts aren’t really in running the family business, to discord between family members.

With that said, it’s really never too early to begin thinking about succession planning. If you’re like roughly 75 percent of business owners who expect to pass their business down to the next generation of family, you can’t afford to be one of the nearly 50 percent who haven’t even started developing a succession plan.


Financial and retirement planning for business owners in Texas is one of our specialties at PAX Financial Group. Get a conversation started!


What to Do First

Assumptions are dangerous, so your first order of business should be to discuss your exit plan with family to make sure everyone is on the same page. Do your kids even want the company? If the answer isn’t a clear and resounding yes, talk to a financial advisor to come up with a Plan B. Nothing sinks a business faster than a new owner who doesn’t care about it.

In your family discussion, make sure you also discuss the timing of your plans as well as your expectations and their visions for the future of the company. Involving your financial advisor in this conversation can help keep the discussion on track, pinpoint any red flags and make sure everyone’s ideas are in alignment – at least somewhat.


Important Step #2

Another important step is to distinguish expected roles of family members and the breakdown of the company between them.

If you have more than one relative to whom you plan to give or sell your business, it’s important – both for their benefit and for the future prosperity of the business – to designate ownership, expectations and responsibilities for each person involved. Consider the skillsets, weaknesses, education, experience and interests of each person as part of your succession planning. If one of your children is a natural-born leader, for example, he or she might make a great CEO or president. If another family member is more creative or a big people-person, you may want to designate him or her as the director of marketing or sales.

You probably haven’t forgotten what your kids were like when they fought over whose turn it was to empty the dishwasher or who should get the last cookie. You also probably don’t want any similar disagreements once they’ve taken over your business. By having a strategic plan for everyone’s roles and responsibilities within the company, and making sure they’re each on board, you can help them avoid many potential conflicts in the future.


New call-to-action What the Transition Will Mean for You

Remember, passing your business on to your children will not only mean a new transition for your children, but it will also be a transition for you! Are you ready?

It’s important to understand and follow your role in the business (if any) when you’re no longer in charge!

One way we help clients make this transition as seamless and painless as possible is to start involving their successors in everyday business decisions and day-to-day operations. Your children can start to take on bigger roles, while you start to reduce your presence and responsibilities. (Remember, there’s not one way to transition into retirement!)

Backing away from work may be easier said than done, especially when it’s your own business that you’re walking away from. Communication and clear planning can be the key to avoiding power struggles and tensions rising. If you’d like to maintain some involvement in the business after the transition, be up front about it. Likewise, if you want to step away completely, let that be known.


The Most Important (and Common) Estate Planning Questions: Can You Afford It?

You might love the idea of simply giving your company to your children as a gift, but if your life savings and retirement funds are tied up in the business, that might not be realistic. It is crucial to make sure you can afford to pass your business on to family, as opposed to selling it, before making any promises!

If you can’t afford to gift the business, or if your loved ones can’t afford to buy it, there are other options you can consider.

At PAX Financial Group, we help business owners navigate these situations. We examine options such as:

  • A leveraged buy-out (where your family members borrow money to buy the business)
  • An installment sale (you’ll receive payments over a specified term, with interest)
  • A self-canceling installment note (like an installment sale, except the payments cease in the event of your death)
  • Non-qualified deferred compensation (the next generation must pay you a certain amount after retirement)
  • A charitable bailout (ownership is sold to a charitable trust, which then sells the business to the next generation)
  • A sale to an intentionally defective trust (where some or all of the business is sold to a trust that designates your family members as beneficiaries)

Of course, these are very simplified overviews of each strategy, and often times, what’s best is a combination of more than one – or none at all! Talk to a financial advisor about what makes sense and is the most ideal for your family and business.

This aspect of your exit plan is another very important discussion to have with your family members. Imagine their shock if they are expecting to simply take over the family business when you are in fact expecting them to buy it. Talk about any purchases and debts that will be involved to avoid surprises or disappointment. Again, your financial advisor can help with these discussions.


Why Work with a Financial Advisor 

As you can see, there’s a lot to think about when selling a business, and there are some pretty challenging tasks to complete. It’s normal to feel confused and overwhelmed. But it doesn’t have to stay that way!

When working with our business owner clients at PAX Financial Group, we see a feeling of relief come over them as we help navigate the process with them. Knowing that we’ve helped other business owners with their financial and retirement planning concerns and are prepared for the what-ifs this situation can create, gives peace of mind to these clients that they need at this time in life.

If you’re not currently working with a financial advisor or feel it’s time to make a change (maybe your current advisor doesn’t have experience with the sale of a business or you aren’t getting the communication and support you were hoping for), contact us! Together, the financial advisors at PAX Financial Group will discuss your strategies and ideas, as well as any questions or concerns you might have. We will hash out all the specifics for your succession plan and make sure you’ve covered all the bases.

Just like when you were getting your business started, having the right people in place to help can be the difference between success and disaster.

Regardless of their situations, at PAX Financial Group, we want all of our clients to be able to pivot into retirement with ease. If that means walking away from a business, knowing that it’s in good hands, and that you’ve given your family a well-run and successful business that will continue to thrive for future generations, we’ve got you covered.

Schedule a no-strings-attached conversation now.

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This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.


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