Your business is your life’s work. Who will run it when you retire or if you die unexpectedly?
Many family businesses don’t survive the transition from founder to second generation, primarily because of family discord and tax issues. A good business succession plan ensures a smooth continuation of the business after your departure, and maximizes your return. It’s an investment in the future, for you, and also for your employees, customers, lenders, and vendors, because good planning shows a commitment to the long term growth of the business.
Family Business Planning is Complicated
Talking about death and money is hard, and family business planning is especially complicated because of the nature of the relationships and emotions involved. A business succession plan governs how changes in ownership and management of the family business will occur. During the planning process, you will evaluate and consider many aspects of your life and business, including: equity, management, taxes, estate planning, insurance, and most importantly – family.
The first thing to do is to find the right team of advisors. Securing the right lawyers, accountants, financial planners, and bankers is crucial to the survival of your business. Good advisors work together in your best interest, know that each situation is unique, and there is no “canned” plan that works for everyone.
When you begin the process, you’ll need to look at your business (and family) realistically, and answer some tough questions, like, who wants to run the business? Who do you want run the business? Who is the most capable of running the business? And though you will struggle with this decision, leaving equal shares to your children simply may not be appropriate.
The three main considerations of the business succession plan are ownership, management, and taxes, and it’s important to remember that ownership and management are separate issues. You can transfer ownership and designate management duties as you deem appropriate. For example, you may decide that your chosen successor, who is active in the business, has a larger share than inactive family members, or you may give both management duties and ownership to your chosen successor and make other financial arrangements for your other children. Sometimes, you may determine that a sale of the business to a third party is the best solution.
You never know what happens in life, so planning early will help your family deal with unexpected circumstances, and give you time to contemplate these important decisions. You should start the process at least 5 years before you want to retire, but starting earlier (10 years) is recommended. Including the affected family members in these discussions should avoid conflicts later on, and will no doubt be a learning process for everyone involved.
Agood buy/sell agreement is an important part of most family business succession plans. The buy/sell should ensure a smooth continuation of the business after certain “triggering events”, including death, disability, retirement, divorce, or termination of employment. You need a buy/sell if you don’t want outsiders in the business, if you don’t want owners to be forced to work with a partner’s spouse, if you don’t want to own the business together with a bankruptcy trustee or creditor, if you don’t want your heirs to inherit a business for which they cannot get a fair price, and especially, if you want to minimize the possibility of future disputes among your heirs.
The buy/sell can be a stand alone agreement, or an integral part of an LLC operating agreement or stockholders’ agreement. It documents the terms and conditions of a future sale and purchase of a departing owner’s share, and controls when owners can sell, who can buy their interests, and at what price their interests can be purchased. The buy/sell can consider tax consequences as well, and since funding (like insurance) is usually arranged when the agreement is signed, money should be there when it’s needed, and your estate will have the liquidity it needs for expenses and taxes.
There are many other planning strategies and options to discuss with your estate and business attorneys who should work closely with your financial and insurance advisors to put the right plan in place for you
Remember that once your plan is established, you are bound by it unless you change it, so because circumstances (and people) change, it’s important to review and update your business succession plan from time to time.
Lisa Aljian is Of Counsel to our firm and works in the Business, Corporate and Commercial Departments. She is also the founder and host of the American Grownup podcast series (www.americangrownup.com).