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Succession is one of the most vulnerable parts of a family business. Protecting a family business so it can survive the retirement, incapacity, or death from one generation of owners to the next requires advance planning for the business and family members.
How can a family protect itself and the family business?
Create and Document a Plan for Leadership Succession
Whether the owners are 34 or 74, a leadership succession plan is imperative. Car crashes and heart attacks can happen without advance warning. The more decisions that are made before a trigger event, the easier the transition will be. Roles and responsibilities should be clearly defined, and the document should be updated as often as needed.
Document and Memorialize Ownership
Informal agreements among family members do not survive litigation from inside or outside forces. Create a Buy-Sell Agreement between partners, or the owner and family members, for the near future or decades to come.
Establish the Type of Entity
What legal form should the business take? Should it be a Corporation, a Limited Liability Company, a Family Limited Partnership, or a Sole Proprietorship? It is important to have a clear understanding of the implications of the different types of entities and their impact on succession, taxation and estate planning.
Retirement Finances and Estate Plan
If the retirement of the owner will be funded by a large portion of the business equity, will the business have enough liquidity to continue operating? Planning for the financial transition years in advance gives all parties the best chance at a successful retirement and the continuation of a flourishing business.
Consider the Use of Trusts to Own Business Interests
Properly structured, trusts can eliminate the need for a court-appointed guardian or conservator and allow the named trustee to operate the business day to day, let alone maintain “good standing” with state and federal governments.
Knowledge Transfer and Process Documentation
A forensic accountant can untangle finances. However, knowledge of processes, vendors and clients needs to be documented and shared among senior officials. If only one person knows how things work, the enterprise is at grave risk. If the only person who has all of this information is a key employee and they leave, the family will be left to reverse engineer the entire business. They may not succeed.
Insurance. Business insurance is often viewed as too expensive, until it is needed. The increasing number of natural disasters and cyberattacks make insurance imperative for any kind of business. Local conditions need to be considered. If a location is near a waterway of any size, flood insurance could make the difference between closing down temporarily or permanently.
Estate Planning for All Shareholders
Family business estate plans are, by necessity, more complicated than a wage earner’s estate plan. If Family Member Partner A is married, will their spouse inherit their shares in the business upon the death of Partner A? What if Spouse A is disliked by other family members and they do not want to be in business with Spouse A? Or, what if Partner A divorces Spouse A, remarries and then dies shortly after remarriage to Spouse B—will Spouse B become an owner?
Conclusion
These are some of the issues addressed by a comprehensive business succession plan. Many owners avoid doing this completely, with the excuse that it is too time consuming. The real objection? A succession plan forces the family to confront business and emotional issues. If a business is to make a successful transition from one generation to the next, it does not occur by accident or luck, but by planning.
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