Ever thought about what would happen to your business when it’s time to step away? Or how to keep it in the family while avoiding a tax headache? Here’s a surprising fact: only 30% of family businesses make it to the second generation, and just 12% last until the third. The stats are even more challenging for Black-owned businesses, with studies showing that only about 17% of Black-owned businesses survive past the first generation. But don’t worry—this doesn’t have to be your story. With some planning, you can ensure your business thrives long after you're gone.

Let me (Geneva Solomon) share a bit from my own experience. Running Redstone Firearms, Redstone Creative, Leaf Café, and Uhaul has been incredibly rewarding but also a lot of hard work. I often think about what happens when I’m ready to step back, retire, or if life throws me a curveball. That’s why I’ve put plans in place to make sure that if something happens to me, these businesses continue running smoothly without major disruptions. Whether it’s illness, retirement, or just taking a break, a solid wealth transfer plan ensures the business doesn’t skip a beat.

In this guide, we’ll walk through the different strategies to protect your business, preserve your wealth, and avoid those pesky taxes. Let’s make sure everything is in place so you can focus on growing your business while having peace of mind that your legacy will endure.

Why Business Owners Need a Wealth Transfer Plan

Running a business takes grit, and if you’ve built something successful, you want to ensure it continues long after you step away. I’ve personally experienced the importance of this planning through managing multiple businesses like Redstone Firearms and Leaf Café. It can be overwhelming to think about, but when you have a solid wealth transfer plan, you’re not just protecting the business—you’re also preserving your legacy for your family and avoiding some serious tax headaches.

A well-thought-out plan ensures your business is passed on smoothly. You won’t have to worry about unexpected taxes or disputes, and your loved ones will have a clear roadmap to follow. Now, let’s break down some practical steps you can take, starting with one of the most important tools: buy-sell agreements.

Buy-Sell Agreements – A Plan to Secure Redstone Creative for the Next Generation

Imagine this scenario: You’ve built Redstone Creative into a thriving business, and while your son Jonathan Lawson Jr. is only 10 years old now, he’s already on the payroll and showing interest in the business. Fast forward 15 or 20 years—Jonathan is ready to step into a leadership role. But what happens if something unexpected happens to you in the meantime, before Jonathan is ready or able to take over?

That’s where a buy-sell agreement comes in. It’s a legal document that protects both Redstone Creative and Jonathan's future role in the company, ensuring the transition happens smoothly and according to your wishes.

Cross-Purchase Agreement Example:

With a cross-purchase agreement, your business partner would personally purchase your share of the company using funds set aside for this exact purpose. This ensures that the business remains stable without forcing Jonathan or your family to scramble for cash or take out loans to keep the company running. The money for this buyout would likely come from life insurance.

Entity Purchase (Stock Redemption) Example:

Alternatively, Redstone Creative could use company funds to buy back your shares under an entity purchase agreement. In this case, the business itself would buy your shares, preserving ownership until Jonathan is ready to step in. This method simplifies things if there are multiple owners or if the company has enough resources to handle the buyout.

Life Insurance – The Secret Weapon for Business Succession

Ever thought of life insurance as more than just a personal safety net? It’s a game-changer for business succession too! Here’s how it works: If a business owner passes away, life insurance provides the funds needed to buy out their share, ensuring the business keeps running without financial stress.

But let’s take it a step further: implementing an Indexed Universal Life (IUL) policy at the start of your business can be especially beneficial. IULs not only provide life insurance coverage but also accumulate cash value over time, which can be tapped into later.

Why an IUL is Great for Business Succession:

• Protection from Day One: If something happens to you early on, the IUL ensures the business has the liquidity needed to buy out your share or continue operating.
• Cash Value for the Future: The cash value component of an IUL grows over time, providing a safety net that can be used to support the business or even for retirement.
• Flexible Premiums: IULs offer flexibility, which is helpful in the early stages of a business when cash flow can be inconsistent.

Smart Tax-Saving Strategies for Passing on Your Business

We’ve all heard the saying, “nothing is certain except death and taxes.” Unfortunately, transferring your business can trigger hefty estate and capital gains taxes if you’re not prepared. But there are ways to reduce the tax burden with a bit of planning.

Here’s why we’re talking about taxes now: When transferring a business, estate taxes or capital gains can significantly reduce the wealth you’re passing down. Without proper planning, your heirs might end up selling parts of the business just to cover the tax bill. Let’s look at some tax-saving tools to help avoid that scenario.

• Revocable Living Trust: This tool helps avoid probate and keeps you in control of the business while you’re alive.
• Irrevocable Life Insurance Trust (ILIT): This removes life insurance proceeds from your taxable estate, potentially saving on estate taxes.
• Grantor Retained Annuity Trust (GRAT): Allows you to transfer business assets to your heirs while minimizing gift taxes.

For Husband and Wife-Owned Businesses:

If you and your spouse co-own the business, it’s smart to have a separate trust for the business than for personal assets like your home or children’s inheritance. Why? Because combining them can complicate the tax structure, and having separate trusts allows for cleaner transfers and better protection. The business trust can be tailored specifically for succession, while the personal trust can focus on passing on personal wealth. 

For Husband and Wife-Owned Businesses: If you and your spouse co-own the business, it’s smart to have a separate trust for the business than for personal assets like your home or children’s inheritance. Why? Because combining them can complicate the tax structure, and having separate trusts allows for cleaner transfers and better protection. The business trust can be tailored specifically for succession, while the personal trust can focus on passing on personal wealth.

Section 5: Why Business Valuation is Key to Wealth Transfer

When it comes to transferring your business, knowing how much it’s worth is essential. Without a clear valuation, you won’t know how much life insurance to get or how to structure your buy-sell agreements. A business valuation ensures everything is set up correctly and helps you avoid any surprises.

How to Get a Valuation
You can hire a professional appraiser or CPA to assess your business’s value. The cost for a valuation typically ranges from $5,000 to $30,000, depending on the complexity of your business. It’s important to get your business valued every 2-3 years or after any major changes, such as expansion or taking on new partners.

Where to Keep the Valuation
Store your valuation documents securely alongside your other legal and financial paperwork. It’s crucial for estate planning and future business decisions, so make sure it’s easily accessible.

Section 6: Other Ways to Fund a Business Succession

Life insurance isn’t the only way to fund a business succession. Here are a few other options, depending on whether you’re passing the business to family or selling it to someone else:

• Self-Funding: Set aside a percentage of your business profits each year. This can be useful if your children or heirs are gradually buying the business from you over time.

• Bank Loans: If self-funding isn’t possible, a loan can help, but it comes with more risk. This is a common method when selling to a key employee or an outside buyer.

• Installment Sales: This lets your buyer (whether it’s a family member or employee) pay you over time. For example, if you’re transitioning Leaf Café to your children or a trusted employee, they could buy the business in installments, making it easier for them to gradually take ownership while maintaining business stability. This method helps avoid immediate financial strain on the buyer and ensures the business stays intact during the transition.

If you’re selling the business to a stranger, installment sales can work similarly, providing the buyer more flexibility while still allowing you to gradually step back. However, ensure that there are strong agreements in place to avoid defaults and financial risks.

Section 7: Preparing Heirs and Key Employees for Business Ownership

Handing over your business is more than just passing the torch—it’s about ensuring the next generation or key employees are ready to take on the responsibility. Whether you're grooming family members like your son Jonathan or preparing a trusted employee, the key is training, mentorship, and setting clear expectations early on.

Preparing Family Members: If Jonathan plans to take over Redstone Creative one day, it’s important to start educating him early on about the operations, finances, and decision-making processes involved in running the business. Even though he’s young now, involving him in small, manageable roles as he grows older will help him develop the necessary skills to eventually lead the business.

Preparing Key Employees: If a non-family member or key employee is your future successor, it’s crucial to outline their path to ownership. This may involve mentoring them in leadership roles, sharing long-term business goals, and gradually increasing their responsibilities. They should have a clear understanding of your vision for the business’s future.

The goal is to avoid any confusion or conflict when the time comes to step away. Whether it’s family or employees, making the transition as seamless as possible ensures the longevity and continued success of your business.

Section 8: Communication and Family Dynamics in Wealth Transfer

One of the most critical, yet often overlooked, parts of wealth transfer is communication. Family dynamics can be complex, especially when it comes to money and business. Open, honest conversations about your wealth transfer plan can prevent misunderstandings and disputes down the road.

Talk About Your Plan Early: Whether you plan to pass the business to your children, sell to employees, or pursue other options, it’s important to discuss this with everyone involved early on. This way, there are no surprises, and everyone understands their role.

Involve a Third-Party Advisor: Sometimes, family dynamics can make these conversations difficult. Involving a neutral third-party financial advisor or estate planner can help facilitate these discussions, ensuring all voices are heard and the plan is executed smoothly. An advisor can also help family members or successors understand the full financial implications and responsibilities involved in owning or managing a business.

Section 9: Philanthropy as a Wealth Transfer Strategy

If giving back to the community is a priority for you, philanthropy can also play a role in your wealth transfer strategy. Business owners often use charitable giving as a way to preserve wealth while making a positive impact.

Charitable Remainder Trusts (CRTs): Setting up a CRT allows you to receive income during your lifetime while eventually donating a portion of your business’s assets to a charitable organization of your choice. Not only does this create a lasting legacy of giving, but it also offers significant tax benefits by reducing the taxable portion of your estate.

Family Foundation: Another option is creating a family foundation, which enables your family to continue your charitable work after you’ve passed on. Foundations can receive donations of money or business interests, which can reduce the size of your taxable estate while supporting causes that matter to you.

Section 10: Business Structure and Legal Considerations

The way your business is legally structured (LLC, S-Corp, C-Corp) will directly impact how easy it is to transfer ownership. Each business structure offers different tax implications, flexibility, and control during the wealth transfer process.

• LLC: Offers flexibility in transferring ownership and can pass through the owner’s estate with minimal tax implications.

• S-Corp: Ideal for small businesses that want to minimize taxes on transferring ownership, but has restrictions on ownership and stock issuance.

• C-Corp: Common for larger businesses, a C-Corp may face double taxation when transferring ownership but provides more structure for complex ownership arrangements.

It's important to review the legal and tax implications of your business structure with an attorney or financial advisor to ensure you’re taking the most tax-efficient route in your wealth transfer strategy.

Section 11: Succession Planning for Non-Family Members

Not all business owners pass their companies down to family members. If you’re looking to transition ownership to non-family members, like employees or external buyers, there are other ways to ensure the smooth transfer of your business.

Employee Stock Ownership Plans (ESOPs): ESOPs allow your employees to gradually take ownership of the company through stock options, giving them a personal stake in the business’s success. This is a great option if you want to reward loyal employees while still maintaining control over the transition process.

Selling to Private Equity or Key Employees: If you plan to sell the business outright, you might consider selling to private equity firms or trusted employees who are prepared to take on ownership. This can provide a clear exit strategy for you, while ensuring the business remains in capable hands.

Conclusion

When it comes to passing on your business, a little planning goes a long way. Whether it’s implementing a buy-sell agreement, securing an IUL policy, or making tax-smart decisions, each strategy ensures a smoother transition, protects your wealth, and provides for the next generation or trusted employees. Take the time to start planning now, and you’ll have peace of mind knowing your business and your legacy are in good hands.

Next Steps: If you haven’t already, reach out to a financial advisor or estate planner to discuss your business succession and wealth transfer options. Putting a plan in place today will make all the difference tomorrow.