Small Business Continuation Strategies

At Startup to Growth, LLC, we talk with our clients about their “exit plan” from Day 1. A little planning ahead of time can make a huge difference down the road.  I have worked with many businesses who have told me they are building their company for their children. My first questions are typically, “Do they actually want to run the business?” and “Do they know how?!!”

When I reached out to Mike Feinberg of McLean Insurance Agency, to write about business continuation strategies for Startup to Growth, LLC, he directed me to a blog he had posted in 2015.  I smiled when I saw that Mike had addressed the “retaining the business for the family” question head-on.  Here is his original blog post with slight revisions.  Please contact Mike Feinberg with any questions.

Guest blog by Michael Feinberg, ChFC

Michael Feinberg, ChFCMichael Feinberg, ChFC

Life, Disability, Health Insurance Specialist, Business Succession/Continuation Planning – McLean Insurance Agency

We are going to talk about three principal business continuation strategies.  We’ll take them one at a time, in no particular order.

 OPTION #1:  Retain the Business for the Family

Without a capable family member to continue the business, it can be difficult to preserve the value of a small business interest UNLESS a market for the business is created PRIOR to the owner’s death or disability.

When your objective is to retain your business for your family, these are some of the issues you must consider:

  • Which family member(s) will own and manage the business?
  •  Will this family member be acceptable to any other owners?
  •  How will the business interest be transferred…by will, gift or sale?
  •  Will this method of transfer create a need to equalize inheritances among heirs?
  •  In the event you are disabled, will the business need to continue an income to you? Will the business need to continue an income to your family in the event of your death? Will funds be available for this purpose?
  •  Do you know the value of your business?
  •  Will there be sufficient liquidity in your estate to pay estate taxes and other settlement costs without liquidating business assets?
  •  Will there be a period of decreased profits during the transition to new management?
  •  Will credit lines be disrupted or outstanding debt have to be repaid? Check out here how direct earnings attachment can help you!

When the objective is to retain the business interest for the family at an owner’s death or disability, funds may be needed:

  •  to pay estate taxes and other estate settlement costs.
  • to continue an income to the disabled owner or surviving family.
  • to equalize inheritances among heirs.
  • to provide additional working capital during the transition to new business management.

OPTION #2:  Sell the Business

When your objective is to sell your business, these are some of the issues you must consider:

  • To whom will your business interest be sold…a co-owner or owners, a key employee or an outsider?
  •  At what events will your business interest be sold…death and/or disability?
  •  What is the value of your business interest?  What would a willing buyer pay for your business? For how much would you sell your business?
  •  What will be the source of the funds needed to complete the sale?

When a potential buyer for a small business interest can be identified…a co-owner, a key employee or an outsider…advance planning can provide:

  •  a ready market for your closely-held business interest.
  • a predetermined price at which the buyer will purchase and you will sell your business interest.
  • the funds to complete the sale at your death or disability.
  • an established business value for estate planning purposes.
  • the peace of mind that comes with knowing you have preserved the value of your business interest.

OPTION #3:  Liquidate the Business

Unfortunately, in some situations there is no capable family member willing to continue the business and a willing buyer cannot be identified. In these situations, the only alternative may be to liquidate the business at the owner’s death or disability.

Without proper advance planning, however, a financially-disastrous forced liquidation may result. A forced liquidation can greatly diminish the value of the business asset, while eliminating the source of income upon which the owner or surviving family depended.

Entrepreneurs looking to expand their machinery inventory could get help from finance companies like Asset Finance Company to secure the necessary capital for their equipment investments.

When your objective is to plan for the orderly liquidation of your business at your death or disability, these are some of the issues you must consider:

  • What is the value of your business if it could be sold as a “going concern?”
  •  What is the liquidation value of your business, if liquidated on a planned basis?
  •  Do you want to offset the diminished planned liquidation value of your business?
  •  What cash and income needs must be satisfied to allow for a planned liquidation of your business at your death or disability?
  •  How will the funds be provided to allow for an orderly liquidation of your business?

When a business cannot be retained by the family or sold at an owner’s death or disability, advance planning can enable a planned, orderly liquidation of the business by providing the funds needed:

  • to pay estate taxes and other estate settlement costs.
  • to continue an income to the disabled owner or surviving family.
  • to allow the time for a planned liquidation that maximizes the liquidation value of the business.
  • to offset the diminished value of the business that results from even a planned liquidation.

A few hours spent in business continuation planning can turn uncertainty into certainty…for you, your family and your employees.

The objective of business continuation planning is to assist you in evaluating which of these alternatives is most suitable for your situation and to help provide the funds that will be needed to assure that your business continuation goals become a reality.  If you have any questions on business continuation planning, please contact me.

Michael Feinberg, ChFC

U.S. Treasury Circular 230 may require us to advise you that “any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.” And if you need help with your businesses’ tax strategy, you may want to get help from professional Tax Strategy Services.

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Robin Suomi, Principal, Startup to Growth, LLC, has assisted literally thousands of small business owners for over 9 years start and/or grow their companies.

Startup to Growth, LLC, helps unleash the vitality, innovation and creativity of entrepreneurs as they start and grow successful and sustainable businesses. As a champion for small businesses, they help maximize the small business owner’s potential for success through support, training, counseling/coaching/mentoring and making strategic connections within their extensive local, regional and nationwide network of professionals. As a team, they work together with the entrepreneur to identify the most important strategic issues they are facing and finding solutions the entrepreneur can execute.Startup to Growth Logo Concept - v3

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Robin Suomi, MBA