Mark W. Jordan Business Planning Law Blog on Lawyers.com

This is the tenth of a series of articles providing helpful information on estate and business planning.  Please contact the estate planning professionals at The Drew Law Firm for more details on any of these topics or for any of your estate planning needs.

             
60;         Do You Want Your Children To Succeed In Your Business?

Definitely!  You have poured your career into building up your company with the hope that one day your children would be ready to take over and continue the success you are having.

Q:  Why is family business succession planning such an important part of your estate plan?

A:  In all probability your family-owned business is the largest asset in your estate.   You have seen the statistics that less than a third of the family firms last for the next generation, and only about a tenth of the companies are successful in the third generation.  With several trillion dollars in assets passing to the next generation the stakes are high, and there is no good reason not to plan now.

Q:  What are the goals for family business succession?

A:  Your succession goals should include at least the following:
     1.    Pass ownership of the business to your children who are not only active in the day to day operation, but qualified to run it.
     2.    Fairly treat your heirs who are not in the company.
     3.    Keep the firm thriving by holding onto the non-family key employees.
     4.    Provide enough retirement income for yourself and your spouse.

Q:  How should you divide the business ownership?

A:  Only give stock/partnership interest to the children who will be active in the company.  Just because you have three children doesn’t mean they each get a third.  If only your daughter will be in the business then she receives 100% of the stock.

     It is equally important to only give shares to your children who have learned how to run a business.  Company ownership is not a birthright, but a privilege.  The stock may be transferred in large blocks or gradually, but the grooming to take over leadership positions takes many years or decades.  Make sure the child does not have voting control until after he or she has the experience and qualities necessary to run the company.  Your family would be far better off to have you sell the firm to a complete stranger and distribute the cash proceeds to family members, than to turn over the reins to your son or daughter who is incapable of making that particular business succeed.  Your child may have graduated as the valedictorian, but if he or she doesn’t have any inclination to run your specific type of business, there is little chance for success.

Q:  Should you treat your children equally?

A:  No.  You should treat them fairly, not equally.  We have equal legal rights, and you love your children equally, but just because you enable one child to receive a $1,000,000 business does not mean each of the other children get $1,000,000 in cash.  If your son worked thirty years in the business, before you transfer it to him, a fair distribution to the others may be a fraction of this amount.  There may be cash from life insurance proceeds, stock, family residence, summer home, etc. that other children may prefer over shares of your company.  It is crucial to talk it through with your children so they understand the equity is the distributions.

Q:  How do you retain the non-family key-employees?

A:  Although it is vitally important that you teach your successor to have the respect of the employees, clients and suppliers, you won’t have a smooth transition unless the non-family key employees are going to stay committed.  Salary increases, bonuses, a small non-controlling interest in the firm, salary continuation plan, and additional medical or life insurance benefits may play a role in retaining these key parties.

Q:  Since you may not be selling the business to your offspring for the full fair market value, how will you have sufficient retirement income?

A:  I have used many different techniques depending upon the financial and family structure.  One approach is to retain the real estate the business is located upon and lease it to the company.  Another approach is a deferred compensation plan funded with life insurance.  There is always a way to smoothly transition your departure from the business with a flow of income back to you.

     The early stages of estate and business planning are critical. If you would like to arrange an initial consultation, please contact our Cincinnati office. Our lawyers will work with you to define your goals, identify significant aspects of your unique situation, and explain your alternatives.

Our estate planning attorneys: Mark W. Jordan, Robert M. Smyth, George J. Zamary, James H. Coogan, Frederic L. Goeddel, Anthony G. Covatta, Michael D. McNeil, Nancy J. Frazier and Sybil B. Mullin.

Related practice areas: estate planning, probate and estate administration, probate litigation, charitable trusts and foundations, business succession planning, gift and estate taxation, prenuptial agreements, division of marital assets, family law, real estate, employment law, mergers and acquisitions, and medical group representation