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Life is full of uncertainty. We work so hard to save for retirement and be prepared for whatever life may throw at us, but we can't prepare for everything. One thing we often forget to prepare for is how the business will transfer to its next owner.

According to studies, around two-thirds of family businesses transfer management to the children. Between 1924 and 1984, 80% of businesses died instead of transferring to a new owner. So how do you transfer ownership to your children, or to someone else who deserves it? And if you don't, will you simply let it die instead?

The first questions you, as a business-owner need to ask are: 1. Will I need cash flows from the business to support my retirement? 2. Do I want to transfer ownership as well as management? 3. Do I want to retain some control of the business? 4. How do I transfer the business in a fair and equitable manner?

A business succession plan is usually written and details a systematic transfer of the management and ownership of a business from one individual or group to another.

The six main elements of a succession plan are: cash flow; governance, ownership; fairness; liquidity planning; and tax planning.

The first decision you, as a business owner, must make regarding cash flow is if you will need cash flow from the business once it is out of your hands. Can the business support the amount of cash flow you will need? Will you and your family be able to maintain your lifestyle without the business? This analysis of the business and your personal cash flow available and needs in the future will require some serious thinking and planning.

Governance issues deal with how management of the company will pass onto another person. Usually, people who have created and built a business have a hard time letting go of its governance. The goal, when it comes to governance decisions, is to look at the business objectively. What is best for the business once you leave? Have you trained someone to take your position? Along with management, you may want to consider compensation planning to retain good management, but not overpay them.

Ownership is a different decision from governance, though sometimes the receiver may be the same person. Businesses can be transferred to one of three potential groups: family, insiders, or outsiders. If you decide to transfer to an outsider, you should transfer the business when its value is at its maximum value. Ownership can be transferred through voting/nonvoting interest, debt vs. equity interest, or separating assets from the business (for example, the family could keep ownership of the building, and lease it to the new owners).

Fairness is probably the most difficult issue to deal with in business succession. No matter how fair you try to be in passing on management, ownership, control, and compensation, those in the receiving positions most likely have their own thoughts of what is fair. The first step to determining how to pass the business fairly is to have a proper valuation of the business and the ownership interest to be transferred. With a third-party valuation, you will know the value of the business so you can determine a fair price.

Liquidity planning involves determining if the business can survive the taxes and incidental expenses associated with the death of the owner? Estate taxes, funeral expenses, funds for setting up a buy-sell agreement after death, and other expenses can seriously hurt a business that isn't ready. Proper liquidity planning and succession planning before the owner's death can save the business from these expenses. Lastly, tax planning can help the owner's achieve enormous tax savings on both income and estate taxes. Using gifts, sales, or "opportunity transfers" can be especially appealing. If you can shift assets or interests in the business to others, you can also shift and decrease the future tax burden.

Obviously, these are a lot of decisions to make and you shouldn't make them alone. Finding an accountant and a lawyer experienced in succession planning can help you objectively view your business and your plans for the future. Finding a valuation analyst can also help you estimate the value of your business. The most important thing to do is avoid procrastination. It will take time to ensure your business passes on and continues to succeed. Begin now, find help, and figure out your future before your future prevents you from doing what you want.

Marie Bray, CPA is a Certified Fraud Examiner and works at the Great Falls office of JCCS.

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