If you draft a will in order to ensure that your heirs are taken care, developing a business succession plan will ensure your company continues to thrive after you are gone.
As the economy slowly emerges from the shadow of The Great Recession of 2009, businesses are also starting to thrive again. While storefront businesses are still a staple of the American dream, use of the internet and the relatively low cost of creating a website and selling a unique product or idea has lowered the barrier to entry for entrepreneurs who wish to start a family business.
If you own or are starting a family business, you are in good company: Forbes estimates that family businesses account for 50 percent of the current Gross Domestic Product in the U.S. This includes 35 percent of Fortune 500 companies (the top 500 U.S. publicly and privately held companies ranked by their gross revenue and published by Fortune magazine) that are controlled exclusively by families.
However, there is a problem with the family business model. According to a Pricewaterhouse Coopers survey, only 52 percent of family businesses expect members of the next generation to be able to run their business. Junior members lack of experience for running a company coupled with poor succession planning are the main culprits.
Get a Prenup for Your Business
If a premarital agreement can reduce headache and anxiety in the event of a divorce, then a similar mechanism for a family business – labeled a Shareholder’s Agreement* – will reduce anxiety and hard feelings when it becomes necessary to distribute assets or make tough decisions regarding the family business.
An agreement among shareholders or family owners lays the ground rules of a family business in terms of important topics such as governance, succession, transfer of assets, liquidity and taxes among others. A Shareholder’s Agreement may address such questions as:
- Board composition:
- Will each sibling be represented?
- Will there be a board of directors?
- Will executives from outside the family be allowed?
- What training experience will be required?
- Decision-making process:
- What is the number of votes needed to approve key issues?
- What is the method for dispute resolution?
- What are the rights of family members?
- Family members not involved in the business?
- Non-family involved in the business?
- Business and Owner Estate Plan:
- Who are the business successors (both managers and owners of the business)?
- What is the compensation for owners?
- What is the remaining profit distribution?
- What are the taxation implications upon sale or transfer of ownership?
- Is there an estate plan? Is it in writing? Is there a timeline for implementation?
Although many small businesses fail, by addressing these issues a small business owner takes steps towards ensuring his or her family’s interests while saving money, and avoiding conflict.
Careful estate planning can ensure that a family business continues to benefit family members and that ownership of the business is not diluted until the business is ready to accept outside investors. Owners’ estate plans should use trusts or other mechanisms to restrict the ability of their heirs to transfer shares. A successful family business is an excellent means to provide financial security for the small business owner and his or her loved ones as well as employment opportunities for interested family members.
Estate planning is a complex field. Whether you are concerned with devising a plan for either a family estate or that of a business, it is important to get good advice. The attorneys at Lonich Patton Ehrlich Policastri have decades of experience handling complex estate planning matters including business succession plans, wills, and living trusts. If you are interested in developing an estate plan or reviewing your current estate plan, contact the experienced estate planning attorneys at Lonich Patton Ehrlich Policastri for further information as we are happy to offer you a free consultation.
Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.