L—Disposition of a Business Interest

For our purposes, there are three primary risks facing the business owner: death, disability, and retirement. Likewise, upon the occurrence of one of these events, only one of three things can happen to his business: it will be continued, sold, or liquidated. The planning process should reveal the answers to these questions

For our purposes, there are three primary risks facing the business owner: death, disability, and retirement. Likewise, upon the occurrence of one of these events, only one of three things can happen to his business: it will be continued, sold, or liquidated. The planning process should reveal the answers to these questions:

WillSUCCESSOR MANAGEMENTbe available and willing to operate the business? Such a person could be either a family member or a key employee, but it is important to be realistic about both their abilities and commitment to staying with the business. A yesanswer will lead to . . .

Would aSATISFACTORY RETURNon business capital be provided for the family? The decision as to what is “satisfactory” is a highly subjective determination, but it usually falls within the range of 6 to 20 percent. Ayesanswer will lead to . . .

CouldTAX-FAVORED PROFITSbe withdrawn for the family? If the business is a corporation, then payment of a salary to the stockholder-employee is “tax-favored” as a deductible business expense. However, the same payments to a surviving spouse might be characterized as nondeductible dividends.

If the answers to all three of these questions areyes, then it is likely that the business could be successfullycontinued. However, should the answer to any one of these questions beno, then this would lead to . . .

Is there astrongdesire forCONTINUING FAMILY INVOLVEMENTin the business? Ayesanswer to this question is often the result of a strong sense of family pride in the business, despite one or more “no” answers to the previous questions. Under such circumstances the business might well becontinued, provided steps are now taken to assure that continuation is possible.3Anoanswer to this question will lead to . . .

Would aBUYERbe readily available? If the answer isyes, then the business should besold, with a binding agreement and adequate funding in order to assure that the sale takes place. Anoanswer to this question means that the business is likely to beliquidatedand its assets sold for pennies on the dollar.

But, even if all of the above questions can be answered “yes,” it’s prudent to ask if family wealth and happiness could be maximized by a sale. Just because a family business can be continued doesn’t always mean that it should be. Sometimes family wealth, harmony, and happiness is maximized by monetizing the business while the founder is still living and the business is prospering.