Employment: Reasons For Family Business Succession Planning

06.01.09

Every family-owned business should make business succession planning a top priority. Eventually, everyone wants to retire. If you own a family business, retirement is more than a matter of deciding not to go to the office anymore. In addition to ensuring that you have sufficient financial resources on which to retire, the larger question of what happens to the business is of major importance. This includes determining who will own the business and in what proportions? Who will lead the business, and what specific responsibilities will that person have? What is the timetable for the plan? What is the period of shared responsibilities, if appropriate? Will your business continue or will it be sold? What transaction will effectuate the transfer of ownership and control? How do you handle family members that work in the business versus those that do not? An analysis of the potential effect of liquidity issues that may arise when the majority of the family’s wealth is concentrated in the assets of the business.

Proper business succession planning addresses these issues thereby allowing the business owner to establish a seamless transition between the owner and the future owners of the business. In family businesses, succession planning can be especially complicated because of the relationships and emotions involved and because of the discomfort most people have discussing topics such as aging, death, and their financial affairs. Perhaps this is why more than 70 percent of family-owned businesses do not survive the transition from the first to the second generation. In most cases, the death knell to the survival of this business is estate taxes or family disharmony, both issues that an effective family business succession plan will address.

Some suggestions to consider when preparing a family business succession plan include the following:

  • Examine the unique talents, interests and needs of each family member. Instead of arbitrarily dividing the wealth equally, assess the particular needs of each family member. Look at each individual’s goals, objectives and ability to handle wealth.
  • Recognize those individuals who contribute to the success of the business. Put yourself in the shoes of family members who have helped build the business with their talent, sweat and tears. Is it fair to divide the business equally among the participating and non-participating family members alike?
  • Consider diversification of your assets outside of the business.
  • Buy-out non-active family members. If dividing your business among all family members is your ultimate decision, consider a plan that includes a means by which the active members may buy-out the nonparticipating family members.
  • Don’t allow tax considerations to be the major factor in developing your plan. At the outset, identify your goals and objectives for the business and your family. Then, seek tax planning advice.
  • Obtain expert advice from attorneys, accountants and business appraisers who specialize and are experts in this type of work.
  • Discuss the plan as soon as reasonably possible. Explain the plan to family members. Explain how the plan operates and will meet your goals. This will eliminate future surprises.
  • Review the plan on a frequent basis. It is never finished. To meet ongoing changes the plan must be regularly reviewed and updated.

By Jeffery C. Rambach, jrambach@dsda.com

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Rebecca D. Bullard

Rebecca D. Bullard

Rebecca represents clients primarily in labor and employment
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