What to Do When the Kids Say ”No”
Other options for family-owned businesses when the heirs don’t want it.

By Jeff Jaworski

You’ve spent the last 25 years raising her and watching her grow from infancy.  She’s touched the entire family in many ways, and you’re now faced with the difficult decision of how to include her in your future plans. She’s not your daughter—she’s your business, but she’s still your baby. So how do you let go when the time comes?

Each year, thousands of business owners face the dilemma of what to do with their business when they’re pondering retirement. Many of them must decide which of their children is most capable of running the family business. However, what do you do when your children have no interest in taking over the business?

Help With Planning
First of all, don’t take it personally—you’re not alone. With all the small family businesses in America, there are plenty of other entrepreneurs in your situation. And there are many financial planners who have been specifically schooled at helping business owners address this very situation, and who can work closely with your CPA and legal advisor.

You’ll want to begin by looking at the broader picture. What is your time frame? What type of retirement lifestyle will you need to support? What additional assets exist to help fund retirement?

The sooner you have answers to these questions, the sooner you’ll be able to determine the role that the business needs to play.
While your business may be a good place to invest some of your assets, it shouldn’t be your only investment. Many different retirement plans exist to help business owners diversify their net worth and take maximum advantage of the tax laws.

There are a number of options for the future of the business, including sale to an outsider, establishing an Employee Stock Ownership Plan (ESOP), grooming an existing employee to take over, and putting yourself in a position financially to simply close the doors at a given point. Each option has advantages and disadvantages, which you’ll want to understand, as well as strategies to both facilitate and enhance each.

Selling to an Outsider
Depending on the size of the company, the sale to an outsider is likely to be the cleanest break from the business, but also quite complex. It often makes sense to use brokers and attorneys, but using professional services can reduce the net proceeds to the owner.

There are some steps that business owners should take before the sale to help maximize the net proceeds. For example, planning with a CPA as many as three to five years prior to the anticipated sale year will ensure that the right accounting is being done to attract buyers.

Normally, accountants try to minimize taxes in the methods they use when assisting business owners. But, that can change when the owner wants to make larger profits or enhance other key financial ratios to make them more attractive to potential buyers. In addition, by consulting with the right financial planner prior to the sale, it’s possible to structure tax efficient deferred compensation plans that leave more money in the seller’s pocket and less in Uncle Sam’s.

Establishing an ESOP
An ESOP is perhaps the most complex method of converting your business to cash, but it can provide significant tax benefits. In general, an ESOP allows business owners to sell their company stock to a qualified retirement plan for the benefit of all employees. ESOPs typically take two different forms: either through the use of a bank loan to leverage the purchase of the stock all at once (a leveraged ESOP), or over a period of time without the use of a loan (a non-leveraged ESOP). Because the plan falls under the category of a qualified plan, there are many stringent IRS and other federal guidelines that must be followed. And, this option requires ongoing accounting and business valuation expenses. While ESOPs are only practical in some circumstances, it can’t hurt to explore the concept with a qualified financial advisor.

Selling to a Key Employee
This is sometimes the smartest move for a business owner and for the longevity of the business.

Often times, the key person is the most familiar with the critical ingredients that make the business successful and has established relationships with important customers. In most cases, the employee won’t have enough money to buy the business outright, so a structured buy out over time will need to take place. When properly set up, this type of sale can create favorable tax planning opportunities.

It is a good idea to secure the interest of both parties and their families with an insured buy/sell agreement using life insurance and disability protection. This avenue may even be a good idea long before you begin considering a sale.

In one scenario, a business owner takes out a cash value life insurance policy as key person protection on his key associate with the enticement that in 15 years, he could transfer ownership (and cash value rights) to her. The cash value could then be used as a down payment on the business, if, and only if, the key employee is still with the company.

Maximizing Personal Worth
For many small businesses, and many service businesses, the previously mentioned strategies may not be viable. In these cases, business owners should begin personal financial planning as early as possible to ensure they make the best use of business dollars to increase their net worth outside of the business.

This is where the use of qualified retirement plans fit in, and in many cases, nonqualified retirement plans. The primary differences between the two are the tax benefits that are available, and the ability to selectively decide who can participate.

In many cases, business owners will use a 401(k) or other similar plan for the primary benefit of their employees, while also designing a non-qualified retirement plan solely for their own use.

In addition to retirement plans, it is perfectly legal for the business owner to set up other benefits for only themselves. Examples include long-term disability coverage and long-term care protection.

Consider the Advantages and Disadvantages
Each of these estate planning options has advantages and disadvantages that are important to understand. However, by starting early and by using qualified advisors, your business can be a valuable part of your retirement, even if it doesn’t stay a part of your family.

Jeff Jaworski, CFP, CFBS, LUTCF is a Certified Financial Planner at Legacy Financial Group where he specializes in assisting business owners and professionals with comprehensive financial planning services. Jeff can be reached at( 913) 338-5000 or