Posted on Oct 03, 2014 by TURNER PADGET LITIGATION TEAM
It’s a harsh, but motivating reality - more than 70 percent of family businesses do not survive the transition from one generation to the next. While many family business owners dream that their legacy will survive deep into their family history, the idea that their long-term investment may not outlast them is a reality they should face … and work to protect against. With some smart and proactive measures, business owners can go a long way to protect against generational demise.
1. Establish a business succession plan
One of the primary reasons family businesses do not survive into the next generation is discord among heirs who cannot agree how the company will move forward after the transfer has occurred. You should address these problems in advance and establish a business succession plan that addresses concerns and avoids any unnecessary conflict during the transition. This plan should be communicated well in advance to your family members and key employees to ensure a smooth transition.
2. Plan for liquidity
Another reason family businesses do not survive is that in some instances, the company does not have enough liquidity for willing successors to transition the business from one generation to the next. If you company is asset-rich and cash-poor, your family may be forced to liquidate assets in order to handle transition expenses, such as estate taxes and payments to exiting shareholders. You should establish measures to ensure your business has sufficient liquidity, either from cash flow, insurance, deferred payments, or otherwise, in order to facilitate a successful transition.
3. Include a family employment plan in the Company’s succession plan
The more clarity you bring to your successors, the less chance of family fallout. The Company’s succession plan should include a family employment plan that includes policies and procedures on when and how family members will be hired, who will supervise them and how compensation will be determined. It should also address business education and training of family members who will take over. If these details are covered in the succession plan, all successors can rely on these provisions and short circuit future conflicts.
4. Consider independent advisors
While the ownership and management of the company may be closely held, hiring independent, nonaffiliated professionals to provide advice during the transition process, and afterwards, is a good procedure. These independent professionals will be able to help guide the family members through important business decisions ensuring that both the interests of the company and the family are being considered and properly balanced.
5. Have a buy-sell agreement in place
In the event that any successors will want to sell or transfer their interest in the business, you should consider establishing a buy-sell agreement to govern the transaction. The agreement can help achieve tax objectives and help maintain control of the family business.
While the statistics on family business transitions look bleak, the problem is largely related to poor planning and lack of communication. If you invest time in providing for your businesses’ future, and undertake the steps outlined above, your family business can beat the odds.