How to Pass a Business to Your Kids

Do you ever wonder what will happen to your business when you retire or pass away? Will it be sold to strangers or could it become a lasting legacy for your children? If you're watching this video, then you're interested in somehow some way passing your business on to your kids. You've already decided, I don't want to sell my business to a third party, which, to be honest with you, would probably be easier and you'll make more money. But if you've already looked at all the pros and cons of that and want to pass your business onto your kids, you. That's what I'm here to talk about. Here's the reality. The business owners that really dream of passing on their business to their kids, only about 20% succeed at getting it to the next generation. The rest end up selling it to a third party, shut down, or it's torn apart. And the really the animosity between the business owner and the kids, not between the kids. I'm Mark Kohler, CPA attorney, bestselling author, and I personally help thousands of business owners. Our firm has helped tens of thousands of business owners build structures to protect their companies and transition wealth. And in this video, I will show you the key strategies the wealthy use that want to pass their business on to their kids. I'll cover the most common mistakes to avoid and the reality is of this dream to pass on the business to the next generation. Stick with me because by the end you'll know exactly how to proceed. If this is what you want to do, let's dive in. Number one, start planning early. Business owners that successfully transfer their business onto the next generation begin decades ahead of the transition. They start talking to their kids about the business, why they started the business, their vision, their dream. They ask their children if they want to have the business. They talk about the value of the business in the family. Sometimes kids have no understanding of why the business owner even started this business. And their dream. We've got to transfer that same energy passion that you have onto the next generation before they're ever willing to pay for it or even work in it or take it to the next level. Most business failures in this succession planning is not because of taxes or structure. It's because of not preparing the children with the process, the vision, the dream. And the most important part in this starting early process is you yourself having a reality check on what this is going to look like. How are you going to get paid in this transition? How are you going to retire? The business may live on, but that doesn't mean you're just going to get a paycheck every day. The kids have to be able to pay you from the business profits and still feel like they're making money and have the autonomy to build the business with the passion and dream that they may have. All of this has got to be discussed and vetted, and it starts now. Number two, you have got to choose the family member that's going to be the leader into the next generation, the now. It doesn't mean you can't share the wealth of the business pro rata meaning equal distribution of ownership or getting multiple family members involved and we're being part owners. But someone's got to be the leader. That one child that you're like, all right, they can run this business, they get it and they'll be fair with the other children. If you don't have this person, this is not going to happen. You cannot let a committee run your business. It didn't work for you to go that route and it's not going to work for the next generation either. Now just choosing this person is half of the battle. Now it's developing them. Maybe it's sending them off to a work for a competitor or a different business or going off to college or additional training. They've got to know what they're doing. They just can't walk into this business and you think they're just going to know how to run it. You've learned how to run this business for years and years. You know how valuable it is. You've got the relationships with vendors, customers, even employees. And your kids have to earn that same respect. So what I'm talking about here is development, developing that family member that they all have the skills, the determination, the fortitude and the wherewithal, mentally even or financially, to run that business into the future. And I get it. It's a process. It's not going to happen overnight. Which leads us to number three, you've got to have a plan right now. If something happens to you, if you were to pass away in an accident of any sort, and we never know when our time's going to come up. Do you have a plan? Even if this leader that you've chosen or trying to develop, they might have this business dropped in their lap sooner than expected. So what I'm talking about is your estate plan having a revocable living trust and a business continuation plan inside that trust. This is a document that explains how the business needs to be ran into the future and how this leader should continue to Build the business or the vision that you had for the business, Maybe even trade secrets you haven't shared yet. This is a very private document inside your revocable living trust or estate plan that gives them the roadmap of how to move forward if you were to have an untimely death. Now this is something we do at our law firm every day. We help clients build their estate plan and this continuation plan for their business. It's so, so important. And in there you're going to talk about how the family is going to pay. Maybe your surviving spouse or the other siblings were beneficiaries of your trust from the value of the business. If you're just going to pop the business into a family member's hands and expect them to pay the other beneficiaries, you got to explain how you want it done. And let me give an example. Think of a farm, a family farm, which is so classic. Grandpa and grandma, they've lived on this farm forever and blah, blah, blah. And all of a sudden one of them passes away. Oh, we want the oldest son to run the farm. Maybe the son wants to run the farm. Well, this son in his mind has been working his whole life to inherit the farm and has been working his butt off. Now he's got to pay his sisters or his little brother for the farm that he's been working to inherit. And they may live in another city or not even locally, and he's got to pay them off. This is not going to sit well. And they say, screw it, I'm out of here. Now the farm is going to be ran by who? And it goes into trustee sale, an estate sale. And mom's there going, what's going on? I thought was the son was going to run the business. He's got to buy out the other kids. Oh my gosh. And this is what happens. See, we just can't plop a business into one of the kids lap and think they're going to buy out the other kids. So you may be thinking, oh, we'll just give them the business. Okay, now is that fair for the other kids, maybe the sisters that have been taking care of mom and dad for years. And now the son walks away with millions of dollars of farmland and they get nothing. Happens all the time. And I've been there at the table and seen it. People, you've got to have a plan. Maybe you buy some life insurance to take care of those other kids. Which brings me to number four. You've got to equalize the inheritance. We need a Plan in place if you die. And we've got to think about everybody involved, the surviving spouse, the kids, or the one kid that may inherit the business. How is this all going to come together? You got to think through this and what's fair and equitable. This is where life insurance may come in. You may say, I'm going to pay for a little bit of life insurance to take care of these other kids and then leave the farm or the business to this one kid, and then that one kid's going to take care of my surviving spouse or the widow. It can get complicated real quick. And this is why sometimes it's just easier to say, sell the business to someone else that really knows what the hell they're doing. But again, if you're determined to get this to the next generation, you got to be willing to have some tough conversations. And this is what we help clients do every day in a business continuation plan and a revocable living trust. Now, number five, you finally got a plan in place just in case, and you're alive and well and you're like, all right, I'm developing this kid. I got a plan over here just in case, you know, the nuclear option. But now I want to develop this child or children to run the business. And I want to pass it to them where actually I get a retirement out of this and they will take care of me, they will support me, they will buy the business. So what I've termed number five is the exit plan. How are you going to transfer the business to the next generation now while you're alive? See, remember, you want money out of this business, but you want the family to take over the business. Okay? So the best strategy here is to think of your children as a third party buyer. Why would they buy the business? How much would they buy it for? How much do you get? And remember, they want to make a living, they want to get paid out of the business, and they maybe want to build the business into the future to another level. They need to be able to benefit from that and still buy you out. So what's the equation? This is where ongoing conversations about an asset purchase agreement, a promissory note and maybe slow transition of ownership could be the best fit. But all of these transactions look very different based on the type of business and the family makeup and the dollar amount. So be ready to sit down and yes, you're going to hate this. Pay some lawyers. Pay some lawyers that are not just trying to take advantage of you. They're but that want to help you in this transition. Again, we help clients do this every day, but they also have to reality check that you're paying for legal work and ideas because we've done it before, we've seen the train wrecks. You're not paying for an hour of legal time. You're paying for the last thousand hours of them. Meeting with families, figuring out the best way to do this so there'll be some cost to it. That's okay. Remember, you want this, you want it to go to the next generation. And we've got to pay for a plan that makes sense for everybody, not just you. At the end of the day, passing a business to your kids is an admirable goal. It's a special experience. You've built this business your whole life and it means the world to you. It's like a child and you want to pass it on to maybe some children or grandchildren so they can take this on and leave a legacy even further for you. But you've got to retire somewhere in there and they've got to feel like they have autonomy to do something special themselves. And there is a roadmap and it starts with open conversations. It starts with the right legal documents and a lawyer that can help you build that structure in the case of a nuclear unexpected situation or a well planned transition. And finally, make sure you're equalizing the inheritance for everyone involved. It keeps peace in the family. Train and transition gradually with clear rules and guidelines in place. And if you'd like help building a plan that works for you and your business, your family, please reach out to my my law firm, KQS Lawyers. We'd love to help you create a customized strategy. And if this video was helpful, do me a favor. Please hit the like subscribe and click the bell so you don't miss future strategies for protecting your wealth and building your legacy. My name is Mark Kohler and I'll see you on the next video.