Natalie A. Roberts, J.D., LL.M.
Natalie A. Roberts, J.D., LL.M.

Family Businesses and Succession Planning: What is Involved?

If you have a family business, even if you are ten or fifteen years away from retirement, it is time to begin planning your exit. If you plan to work in the business indefinitely, planning is nevertheless necessary, because you need to plan for what will happen to the business if you become incapacitated or if, for any other reason, you will no longer be available to run your company.

Here are some of the issues you must address well in advance of any type of exit:

1.       Do you know yet whether you eventually want to transfer the company to employees or family members, or sell to a third party? These decisions can be difficult, especially when your eventual exit seems far away. And for those who have a problem relinquishing control, the decision-making can be especially painful.

2.       Is the business in good shape? If you wish to maintain the option to sell the business, it is never too early to conduct an internal audit of business health.

a.       Does the business have an operating agreement, partnership agreement, or Articles of Incorporation and bylaws? Are the other required books and records complete and up to date? In addition to the business benefits of responsible record-keeping, maintaining proper books and records can protect you in the event a business creditor seeks to pierce the veil and reach your personal assets. Especially for corporations, respecting corporate formalities is critical.

b.       Are executive compensation agreements in place? Employee handbooks? Nondisclosure agreements? Scheduled reviews should be calendared and assigned.

3.       If you want to transfer the business to family members (or a family member), decisions must be made as to the following:

a.       Will your plan include provisions for transfers down the generations, or will it be limited to your own transfer of the business?

b.       Will the transfer be made by gift, sale, or option to purchase? What are the tax implications of each strategy, to you, the company, and the new owners? There may be estate tax, gift tax, generation skipping transfer tax, and income tax ramifications.

c.       Do all of the next generation want to actively participate in the business?

                                                               i.      If not, will those who choose not to work in the business receive any benefit from the business? Will they be entitled to distributions? Will they have voting rights? Or will they receive some other type(s) of assets instead of business ownership interests? Using life insurance products as wealth replacement for these beneficiaries is a terrific option, but your life must be insurable, so you should put some insurance in place now. You can create an Irrevocable Life Insurance Trust (ILIT), which will provide liquidity to pay out to these beneficiaries and will also provide asset protection.

                                                             ii.      If one or more family members want to participate in the business, will they inherit the business? Will they have to buy the business, or contribute capital? Will their spouses be involved? How stable are the families? Are the future owners going to be able to successfully run the business? Do they understand the business and have good judgment? You should prepare an inventory of necessary skills. It may be necessary to invest in their financial literacy and other competencies. Will key employees remain onboard to ease the transition?

                                                           iii.      What are the rights and responsibilities between family members who are active in the business and family members who are inactive in the business?

                                                           iv.      If more than one child wants to take over the business, who will have ultimate control?

                                                             v.      Does the family have a mission statement, value statement, or any similar plan in place to ensure that the future owners will be on the same page with respect to the goals for the business? Have you created a system for resolution of conflicts among family members? Some families have created a Family Constitution.

                                                           vi.      What happens to ownership shares when the share owner marries, divorces, or dies?

4.       What are your needs and goals for post-retirement or post-sale?

a.       What are your expectations for future income?

b.       What are your needs going to be?

c.       Do you want to be paid out in stages or immediately?

d.       Do you want to be involved in the business in some capacity?

e.       How will your surviving spouse be involved, if at all? Will the spouse own the business?

f.        Is the surviving spouse comfortable with your plan?

5.       If you plan to sell to employees, how will the purchase be paid for? Are they sufficiently compensated to remain onboard? Will you use an ESOP?

6.       Do you have co-owners? Is there a buy-sell agreement in place, so that if one owner becomes incapacitated, dies, or wishes to leave the business, either the other owner(s) or the business can buy out the departing partner? Is there insurance in place to finance the transaction?

7.       Should you transfer your business to a trust, as part of your estate planning? Will it be an irrevocable or revocable trust? What are the pros and cons of each kind of trust? Who will serve as the Trustee?

8.       Do you have a plan in place for how the business will continue if something should happen to you? Who will manage and control the business? Are all of the proper written authorizations in place?

These critical decisions, and more, should be addressed now, and not left until it is too late. Implementing the long-term plan will require a great deal of preparation, even after decisions are made. Your attorney can help counsel you with regard to all of the options available. If I can help, please let me know. 

Natalie A. Roberts, J.D., LL.M.

Natalie A. Roberts, J.D., LL.M.

Natalie Roberts is licensed to practice in both Florida and Minnesota. She is dedicated to providing honest, exceptional and deeply personalized legal counsel to her clients.

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