Tuesday, March 29, 2016

5 key issues in family business succession planning

A recent article on Forbes.com identifies five key issues that a family business lawyer should consider when discussing succession planning with clients who are transitioning a family business to a new generation.  The issues listed in the article are:

  1. Generational transition. Only a third of all family businesses successfully make the transition to the second generation.
  2. Alignment of family interests. Alignment of interests between current owners and others becomes more pronounced as members retire and turn over the reins to the new generation, while at the same time looking to the company for their retirement income.
  3. Balancing of financial returns. Creating buyout agreements is challenging. When the retiring generation looks to the value of their interest, they sometimes tend to look to a balance sheet number. In fact, the true value of a business should probably be based on an earnings capitalization model, a concept unfamiliar to many smaller family companies.
  4. Interfamily disputes. The interest of one family member may not be aligned with another family member. These situations can become even more difficult where there is, for example, a divorce of a family owner or a death and the surviving spouse is holding stock (and voting rights) but is not involved in the business.
  5. Estate and inheritance issues. These include taxes and probate delays upon the death of a family owner.
Of course, every family business is different and every family is different.  In relatively small family-owned businesses, for example, the current $5 million unified estate and gift tax exemption may take estate taxes completely out of the equation.  

Succession planning for family-owned businesses is an area where professional advice from an experienced family business attorney is critical.  Crafting a workable solution with the family can avoid or at least minimize the discord that often comes after the death of the principal owner and can help assure that the transition of the business to the succeeding generation is as smooth as possible.

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