Today, the vast majority of new loans are to closely held businesses. These loans make up the bulk of the small business and real estate loans in the small banks loans portfolios. Yet, bankers have not secured themselves against the fact that many businesses will fail to survive beyond the first generation. The main reason is the failure to plan for the disposition of the business at an owner's death, disability, retirement, sale or withdrawal. For an owner of any closely held business, only three choices exist for the disposition of the business interest:

• Sell to co-owners, family members or outside third parties.
• Liquidate the business.
• Retain the business within the family.

Selling the Business Where the appropriate plan of action would be to sell the business interest of a withdrawing, retiring, disabled or deceased owner, establishing a formal plan for its sale may be one of the most important actions the owners ever take with respect to their business. Procrastination can be costly. Failing to effectuate a plan could jeopardize the business' continued success. The following questions may need to be addressed when owners fail to plan:

• If there is an arrangement between the selling party and new management, will conflicts arise between the departing owner or heirs and the remaining owners over management of the company, control or money?
• Are the inexperienced heirs looking to participate in the business, creating friction between the heirs and existing management? What incentives will work when the company can't afford them?
• The departing owner or the heirs may want to sell the business interest. If no willing buyer with the available cash exists among the remaining owners, will the heirs or departing owners be forced to sell to outsiders or liquidate?

The Cure: Business Transfer and Outlet Planning for Owners of Privately Held and Family Businesses.

Keeping the Business in the Family
If given the opportunity, it seems only human to want to pass on the benefits of a successful business to family members, partners or key people. The possibility of rewarding those that have toiled beside you or the desire to bring your own family into your life's work can be fulfilling. Not to mention that you may retain income and control during the transition stage into retirement. The following succession issues may come up regarding business transfers during life and ultimately at death.

Transferring Stock through Gifts stock

• How will you retain the income from the business or are there sufficient assets producing enough income to allow the business income to be used in funding the transfer?
• To the extent the business is transferred to your children, are you diminishing the proceeds you or your surviving spouse would receive from a sale of the business?
• To the extent your gift to key people, are you decreasing the value to your future heirs who may not be as fortunate as you?
• If the business is gifted only to the active children, will there be an unequal distribution of the estate between those children and the others who are not active in the business?
• Absent a buy-sell agreement, is there a restriction on subsequent conveyance of the gifted stock by your children, putting your business in the hands of a third party?
• Are you prepared to relinquish control of the company?
• A distribution plan for stock not disposed of through lifetime gifts must address such issues as retirement income, estate taxation and equalization.

• Will installment payments impose too much of a burden on the company, especially when expressed in terms of the sales required to generate the after-tax profits necessary for the principal payments?
• Will the surviving spouse's financial security be held hostage to the children's ability to continue the payments after the principal's death?
• Should an installment obligation remain upon the death of the survivor, is the note an illiquid asset includable in the estate and subject to estate taxes?

• What will the source of income be for the surviving spouse? If not carrying out duties commensurate with the salary, upon audit, the salary will be re-characterized as a non-deductible dividend. Further, sales and profitability could decline due to the absence of the deceased spouse, increasing the risk to the survivor.
• Will conflicts arise between the children and the senior generation? The surviving spouse will generally prefer security and dividend distributions, the children may wish to pursue an active growth strategy, requiring cash and entailing more risk.
• All of the business growth, presumably attributable to the children's efforts will be included in the survivor's estate. The children will be burdened with unnecessary estate tax on wealth they created.

• What will the source be of income for the surviving spouse?
• The greater the portion of the estate represented by the business, the greater the likelihood of unequal estate distribution. How will the estate be equalized? Is the sale must be at arm's length (otherwise a taxable gift tax could assessed)?
• Will the children or business have the cash necessary to buy the company? If an installment note is required, will the business be able to support the payments, especially after the death of the business "creator"?
• Does relying on installment payments place the surviving spouse in a vulnerable position?