Avoid a minefield: business succession planning for the family business

Business succession planning should begin earlier rather than later.

A family entrepreneur who has developed a successful family business must give careful and early thought to succession planning. This means making difficult decisions about what should happen to the business if and when the owner becomes disabled, retires or dies.

The particularly difficult thing about succession planning for a family business is that it is not only about making smart business decisions for the future, but also about handling related family dynamics that can come with emotion and even drama. It behooves the owner to recognize that these family issues will permeate decision making about the future of the business, but that difficult decisions should be resolved while the owner is active and engaged, rather than later when he or she is unable to participate.

In business succession planning, the role of the attorney is to listen to the owner's personal and professional goals and concerns, provide legal and constructive advice about the various legal steps that could be taken to get there, and draft carefully the legal documents that will put the plans in motion.

In addition, the business succession plan must coordinate with the owner's personal estate plan because certain issues will naturally overlap. For example, the plans must work together to provide for matters like life insurance, ongoing family income, creation of trusts and naming of trustees, lifetime transfers and so on, all with an eye toward personal and business tax ramifications.

The first question for the business owner is to decide for certain whether the business should continue beyond his or her involvement. It may be a foregone conclusion that the business should continue to develop and grow into the next generation, but sometimes, the owner's preference may be that the business be closed or sold when he or she is no longer involved.

If the desire is to have the business continue, several key issues must be considered:

  • Who will control and manage the business; will it be family members only or will trusted employees or new hires be considered?
  • How will the interests of family members who are not active in the business be handled?
  • If needed, how will business assets and income be funneled to family members like a surviving spouse?
  • How will future internal business disputes be handled especially among family members; could mediation or arbitration be imposed?
  • How should the buy-sell agreement handle future ownership interest transfers; what events would trigger mandatory transfers of ownership; who may they be sold to; when an owner wants out of the business, what happens to his or her share; how will business interests be valued in these events?
  • Who will own real estate and buildings used by the business and how will commercial leases be handled?
  • If trusts are set up for any of a variety of reasons, who will act as decision-making trustees and successor trustees?
  • And many more issues

It is extremely important that the business owner engage legal counsel to help sort through the minefield of professional and personal issues that arise in business succession planning for a closely held family business, and that the business law attorney retained have this specific experience. The lawyer must understand the interplay of long-term business goals and personal estate planning techniques, as well as related tax and property issues.

For family business owners in the Annapolis, Maryland, and Washington, D.C., area, a business succession lawyer from the Annapolis-based law firm of Bernstein & Feldman, P.A., can provide the necessary skill, experience and knowledge to accomplish these personal and professional goals.

Keywords: business succession plan, family business, owner, decision, estate plan, income, closely held