Many family businesses are rooted in the classic tale of the entrepreneurial founder who built a prosperous enterprise to last generations. Successful family businesses come in all shapes, sizes and stages—whether it's a young couple who built a thriving startup, siblings who left their parents' company to start their own venture, or mother and daughter co-founders looking to sell the business and start a new chapter in their lives.
While the journeys of today's entrepreneurs may be different than those of established family founders, the importance of preparing for the future is the same. It helps entrepreneurs be proactive rather than reactive when issues do arise and helps protect their wealth and their business. The challenge is, with considerable demands on their attention in the day-to-day, entrepreneurs can easily overlook long-term planning. Here are three key considerations for today's entrepreneurs and their families.
When you go into business with a trusted business associate, you might not think you need a shareholders' agreement, as you don't foresee any conflicts down the road. But, as a colleague of ours always says, "the best reason for a shareholders' agreement is so you don't have to use it."
At a basic level, a shareholders' agreement is a legal document that outlines the shareholders' rights, restrictions and obligations, along with how the company will be managed. Detailing how certain matters between shareholders will be handled ensures there will be no confusion about what steps need to be taken if an issue arises.
The agreement also sets rules for who can own shares of the business. For example, you can determine if ownership is restricted to spouses and family members, or if key employees will also be able to own shares.
Shareholders' agreements also address more difficult issues, such as what happens if a shareholder wants to leave the company, or if someone dies or becomes incapacitated. This usually involves the articulation of a process for one side to buy out the other and how the buyout price will be determined and funded.
Simply defined, an exit strategy is a strategic plan for how you will eventually sell your ownership in the business. And while it's no doubt difficult to think about how you'll leave the business when you're busy building it, that's nevertheless exactly the right time to create an exit strategy.
From transferring business ownership or selling it outright to a family member, to selling the business to a competitor or taking the company public, a number of considerations may influence your choices when formulating your exit strategy, including the ultimate aim of the business and what role, if any, you'd like to play in the business's future.
Critically, putting a plan in place for your departure gives you more control over how and when it will happen and allows the process to be as smooth as possible. A well-defined exit strategy will also help you to better manage the tax implications of your departure and to maximize cash flows.
Tax and estate planning
Here's a sensitive but important question to think about: If you had died yesterday, do you know what your tax liability would be and how your estate would pay it?
Frankly, many entrepreneurs are shocked to find out the amount of tax that could be payable as a result of their passing, and often have no easy liquidity options to fund it. It may seem like a basic thing to know, but many haven't considered it and often don't even have a will—or, if they do, have not reviewed it in years, even in cases where their estates have since changed significantly. These are essential considerations to preserve your wealth and ensure your wishes are realized.
One final piece of wisdom is that you must find what's right for you. For example, younger entrepreneurs often tell us a business acquaintance has said they should settle a trust. However, while there are advantages to settling a trust, not everyone needs one. Plans also need to evolve over time, so even if something worked for first-generation business owners, it may not work for the second generation. When it comes to tax and estate planning, one size does not fit all and tailor-made planning must involve what is right for you, your personal situation and your wishes.
While you may be focused on growing your business, it's vital to plan ahead and be prepared because planning for the future is also key to ensuring the continuity of your business. Even if it's later in the game, it's never too late.