Last week, I shared some reasons why most business owners tend to think business succession is complicated. Adusting your frame of reference is all it takes to make a concept that seems large and unwieldy more managable.
Separate Wealth From Business
The vast majority of my clients are first generation owners with limited family members who are interested in their businesses. Most of these are smaller businesses (under $20 million in annual revenue). So I am not talking about the large, multi-generation family businesses that are the focus of many other professionals in the succession field. Yet, even these clients of mine have issues of fairness concerning the passing of their business-centered wealth to their heirs.
Going back to the post title, my advice to owners is to make it as simple as possible by separating their wealth from their business. If an owner has liquid capital to distribute that is apart from the business, the whole question of fairness and who gets what becomes much easier.
The Simple Way To Separate Your Wealth From Your Business
The first question that comes back from owners is, “How do you do that?” And the simple answers are insurance and cash flow planning. The former being the easiest while the latter requires more foresight and discipline.
The life insurance option – I do not sell insurance. But I do know how hard it is to create liquid, distributable value from a business – especially when heirs have different motives! Bluntly, (assuming no health issues) with a bit of forethought you can buy a lot of insurance. This creates wealth that is liquid. Wealth that when distributed by an owner can be used as heirs so choose – including buying the founder’s business if there are family members who are involved and have the desire.
The cash flow option – In past articles and in my book, Shortcut to Security, I have argued that the cash flow producing capacity of a smaller business is its primary wealth-producing attribute. Following the strategies I have outlined, owners can start building liquid tangible wealth outside of their business. This capital can be used, if an owner prefers, like the proceeds of life insurance.
Don’t Stick Your Head In The Sand!
You should do estate planning. You should do tax planning. The means in particular for the heir that wants the business can have lots of tax complexity. But first of all, stop avoiding the issue, pretending that it will take care of itself, and running away from hard decisions that reflect on your mortality! You’ve worked so hard to build your business and have most likely faced crises beyond counting. Have the courage to deal with the last chapter. And for goodness sake, buy some insurance, if you can, and make things easier on everyone by ensuring liquidity to resolve situations between heirs.
This post is not just a blatant plug for my book! As always, I’m interested to know what you think. Please do so in the comments.