Dealing with an Inherited Business
It is a great honor to inherit a family business. However, when there is a leadership void or a failure to plan for estate taxes, the risks of such a legacy can quickly outweigh the rewards.
Business owners are often so focused on the day-to-day responsibilities of running a company that they must consider what will happen when they step down. This can put the business’s heirs in a difficult situation. 90% of American businesses are family-owned, but most lack transition or succession plans.
Ideally, every family business owner should create a comprehensive succession plan and vet it with a knowledgeable legal, accounting, and banking team to ensure that all of the necessary pieces are in place to ensure a smooth transition to the next generation.
While there is no substitute for proper planning, alternatives can assist beneficiaries in navigating the tax bill, particularly without resorting to a fire sale.
Here are some tips for managing an inherited business, including determining its viability and dealing with unpaid taxes.
Step 1: Analyze the prospects.
Identify whether you can successfully continue the business. For instance, a business relying on the deceased’s knowledge or existing connections can be difficult for the successors to manage. It can be challenging to continue where they left off unless you were trained by the owner and fully absorbed in the firm’s daily operations.
Think about the company’s potential future revenue as well. You want to ensure the company can produce net income under your direction.
Step 2: Participate with stakeholders.
An unexpected transition often brings uncertainty for employees, customers, and vendors. Employees, especially, can be shaken by fear of losing their jobs. Sometimes, team members may mourn the loss of your loved one, too, which can inject additional emotion into an already uncertain situation.
Make time to discuss the company’s short-term plans as soon as it is practical, whether that involves speaking with important personnel like managers and supervisors or with the employees themselves.
Step 3: Identify the business worth
The firm is included in the estate’s assets, which must all be valued for taxation. Although taxes are frequently calculated based on the worth of the assets as of the estate owner’s passing, this is not always the case—an essential factor to consider for inherited enterprises whose long-term prospects may be in doubt.
If the value of the assets drops within six months of the decedent’s passing, the estate may choose a different valuation date. After six months, when you have a better understanding of the situation, you should make any final decisions regarding the company’s direction. The accompanying tax bill could decrease or disappear entirely if the value decreases during that time.
Step 4: Start with the Business Planning
Moving from the triage phase that frequently occurs after an owner’s passing to long-term planning that establishes a basis for stability, consistency, and growth is what you should do if you’re committed to expanding the business.
Business plan: This document outlines what success for your firm looks like and the measures you’ll take to get there, from assessing the industry to setting a budget.
There are numerous methods to structure transfers, all of which have significant implications. Expert accountants, attorneys, and bankers can offer vital advice in this area to maximize everyone’s benefits and minimize unfavorable outcomes.
A lot of problems and uncertainties might be raised by business inheritance. It can be difficult to manage the emotional impact of that and the legal and financial ramifications of business ownership, particularly if the inheritance follows the loss of someone you love.
-As soon as you inherit the business, review all the financial, legal, and tax documentation.
-Engage a private attorney who can assist you in determining the existing state and potential future difficulties facing the company.
-Informing your future business plans should be the previous owner’s succession plan and business plan.
-Do the required tax and legal paperwork.