There are millions and millions of family businesses in the US. A typical scenario is where Mom and/or Dad started a business and through significant dedication, effort, and tax and business planning over a period of time turned their business into a financial success.
But inevitably there comes a time when Mom and Dad realize that there is one big question to be answered that they have not yet fully addressed. And that is what happens when they reach retirement age, illness strikes or that they would like to do something else? What happens to the family business? Do they liquidate it, sell it to key employees or a third party or leave it for the kids?
Statistics seem to show that most family businesses do not wind up with one or more of the children after Mom and Dad depart. However, a reasonable percentage of such businesses do make it to the children. Whether the business succeeds under the leadership of the following generation is a whole different question.
If Mom and Dad want to keep the business in the family, many questions arise necessitating their developing a succession plan that addresses contractual, tax, personal and estate planning questions.
Do any of the children currently work in the business? Do any of the children have the requisite business, management and planning skills to take over the business? Should children not active in the business have any ownership in the business? What if the children chosen to participate in the business do not have equal abilities or work habits? Do Mom and Dad have any biases favoring one child over another that would result in the wrong child eventually taking control? Are there any family issues that need to be worked through before the succession plan can be put in place? To develop a succession plan, should the business be restructured into a different form of entity that might offer additional flexibility, but not a way that would complicate a future sale of the business to a third party? And will there be any conflicting language between any entity documents, including a buyout agreement, that would conflict with estate planning documents.
Developing a good succession plan takes time and should have the input not only of the lawyer, but the CPA, financial planner, insurance agent, banker and others as needed. We have seen situations where Mom and Dad do not really know the value of their business, which may necessitate engaging a business appraiser in order to make the succession plan meaningful, fair and reasonable.
We are always happy to provide our assistance in this area.
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.