In life, everything has a cost. There are the things that we see, but there are also the things that we don’t see. And unfortunately, the cost of the things we don’t see could be significantly greater than the cost of the things that we see.
When it comes to business succession planning, a lot of business owners tend to put it off. They don’t want to pay the cost of getting the planning put in place and funding the plan. But what they don’t see is the cost of that inaction.
When it comes to family businesses, there are a lot of dynamics involved. You have spouses, you have children that are involved in the business, you have children that aren’t involved in the business, and it could get a little sticky. So how do you smoothly transition and allow the next generation to step in, gain control of the business while you’re still there and ultimately at your death?
One thing we know for sure. Fair is not equal, and equal is not fair. What do we mean by that?
Let’s assume you have two children, one working in the business and one who is not working in the business. If you leave the business 50/50 to each of your children, that’s not fair to the child who’s working in the business. And ultimately, it’s not going to be fair to the child who’s not working in the business.
The child who’s working in the business wants to grow the business. The child who’s not working in the business wants to take income from the business. Those conflicting goals can cause a lot of strain on the relationship of your children, and it could also put a lot of stress on the business.
If I’m the child who’s working in the business and my sibling is getting half of the profits, what motivation do I have to build the business If I’m only getting half of what I deserve, what I’m earning, and what I’m working towards every single day?
Conversely, the child who’s not working in the business wants to take as much income out of the business as possible, stripping the business of its profits and its ability to reinvest and grow the business.
So how do we solve this issue? How do we make sure that the child who’s not in the business gets properly compensated from her parent’s estate and make sure that the child that’s in the business is able to grow and expand and really profit from what their parent has established for them.
And the answer is with properly documented and properly funded businesses succession planning. You see, business succession planning lays out exactly what you want to have happen at your death, disability or retirement to take care of the child that’s in the business as well as should properly fund the buyout of your other child who’s not involved in the business.
But the problem becomes how do you come up with the funding, the liquid cash to buy out the nonparticipating child? That’s where proper planning comes into play. And there are many ways that you could fund or reward the child who is not participating in the business.
Number one, you could pay cash. Keep it liquid. Take it out of the business. Buy out that child. Number two, you could finance. You could go to the bank finance a loan, and pay it back over time if you don’t have the cash. And the third way is to buy life insurance, insuring that first generation owner so that at their death, liquid cash comes out of the life insurance policy and allows us to buy out that other sibling.
By insuring the first generation owner. Nothing happens until that person dies. And the event that creates the problem, the distribution of the business or the value of the business is also the event that triggers the solution, life Insurance.
If you’re interested in learning more about how to put this process to work for your family business, check out our website at Tier1Capital.com and feel free to schedule your free strategy session today.
If you’d like to learn more about how we put this to work for business owners, check out our free guide for business owners.
And remember, it’s not how much money you make, it’s how much money you keep that really matters.
