Leaving behind a share in a small businesses is not like passing along stocks in a publicly held company that can easily be sold in the blink of an eye. If you simply leave your share in hands of your family members, you are leaving your partners in a vulnerable position. Your heirs may want to be involved in the day-to-day operation of the business and your partners may not feel comfortable with this arrangement.
Another possibility is that your family could sell your share in the business to whoever came along making the largest offer. This individual or entity may not have the best interests of your partners in mind. And of course, if your partner or partners predecease you, you will be the party who would have concerns.
Small business succession challenges are usually handled through the execution of buy-sell agreements. With a cross purchase plan, each co-owner purchases an insurance policy on each other. Upon the death of one of the partners, the combined insurance policy proceeds are used to buy that partner’s share in the business from his or her estate. The entity plan is also commonly utilized. With this approach the business entity itself takes out life insurance on all of the partners. Should one of the partners pass away, the insurance benefits are used to buy that individual’s share in the business from his or her family in accordance with the terms that agreed to by all the partners.
Clearly small-business owners must be proactive about addressing the intricacies involved in arranging for an exit strategy that is fair and equitable to all parties involved. The best way to explore all of your options and ultimately take action is with the assistance of an experienced estate planning attorney who has a background assisting small business owners.
Pyke & Associates, P.C. is a member of the American Academy of Estate Planning Attorneys.