Business Succession Plans
Family businesses are integral to our economy. About 90 percent of all businesses in the United States are owned or controlled by families. Often, though, a family business does not survive its founder’s death. About two thirds fail when the original owner dies or retires, and a significant amount do not survive a second transfer.
Some family-owned businesses fail because they lack the money to continue after a founder’s death. Sometimes, the founder’s estate has to sell the business to cover estate or income taxes. In other cases, the successors to the business do not understand how to run it, and mismanagement drives it out of business. The named successors to the business may simply lack the desire to continue running the business. Some businesses lose their customer base because of a rough and destabilizing transition.
All business owners should include in their estate plans a plan for the transfer of the business after death or retirement. Without a succession plan, the interest in the business will be passed on to the owner’s descendants, absorbed by the other shareholders, or a combination of the these.
Distribution of a family business often causes disputes among the owner’s heirs. Those who are involved in the operation of the business may feel that they are entitled to a larger share than other heirs who were not as involved in running the company. Additionally, the business owner must ensure that there is enough cash in his or her estate to fund the succession plan, and avoid having to sell the business to pay the estate’s other debts or to pay estate taxes.
Usually, a succession plan involves either retention planning or buy-sell agreements. Retention planning means ensuring that the company, or shares of the company, stays within the family after death or retirement. The business owner will need to specify which family members will control the business’s assets after death or retirement.
A buy-sell agreement is a contract providing for the transfer of an interest in a business when one of any specified triggering events occurs. Triggering events often include circumstances such as death, disability, and retirement. Upon the occurrence of the triggering event, the buy-sell agreement gives the named parties the right of first refusal. This means the first opportunity to accept or reject shares of the business, before any outside parties have the chance.
Buy-sell agreements should be created for family members or other parties who have an interest in the business. They can be used for any type of business entity—corporations, partnerships, or limited liability companies. Buy-sell agreements are binding on third parties, including the original owner’s estate.
If you have an ownership interest in a family business, it is essential to the future of the business to create a properly drafted succession plan as part of your estate and retirement planning. An experienced attorney can help you figure out how to fairly divide your business interests, and minimize conflict among heirs. If you have an interest in a family-owned business and do not yet have a succession plan, please contact the Law Offices of Larry E. Bray in Boca Raton for a free initial consultation.