Business Succession Planning: Preparing to Transfer Your Family Business to a Child or Family Member
In today’s business world, family businesses, also known as closely held businesses, are quite common. These are businesses in which ownership is controlled by a single family, whether it is siblings or parents and children. Whatever the relationship of the owners, one single family controls the management of the company as well as every other aspect of the business. Many of these businesses will eventually be passed on to the children of their owners. Unfortunately, many business owners do not plan for this transfer, which can lead to the business falling apart. To assure that your business operates properly and will be properly transferred, one should follow certain formalities and plan for the transfer.
What Formalities Should Be Followed When Transferring Your Family Business to a Family Member?
Many family businesses are quite successful due to the strong relationship between their owners. Unfortunately, many family businesses today rely on this strong relationship in assuming they do not need basic business formalities that all other businesses have. For example, many family businesses do not explicitly write down company policies. In the event the relationship between the owners turns for the worse, the business can be left in controversy and can disintegrate within a short time. It is important to follow certain formalities to assure that your business will always be governed properly amidst any unexpected events, to assure that eventually you will be able to pass it on to your children and heirs.
It is a good idea to explicitly describe the identity, direction, and discipline throughout your company. This involves documenting many aspects of your business, including for example: the mission and core values of the business, shareholders agreements, employer-employee agreements, company policies, the structure of the company, and plans for how the company will be transferred when that time comes among others.
A formal governance structure should always be implemented, regardless of how many family members are in your company. Many family businesses today use a shareholder system, with shareholders meetings to discuss official company matters. Other closely-held businesses have a committee or board which represents the owners and decides the company matters.
A shareholder’s agreement is arguably the most important document that must be implemented immediately if you do not have one. These agreements should indicate the current value of the company, as well as dictate board membership and contain buy-sell agreements among shareholders. Buy-sell agreements are important because they indicate the terms of sale should any owner of the business decide to exit the company. While everyone always believes the company will run smoothly, personal relationships may break. A proper buy-sell agreement states how the company will be divided, who purchases the shares, how much the departing shareholder will receive, etc. This prevents even more stress that people face in the event of a departure.
Why Should I Start the Planning Process Now? What Problems Will This Planning Help Me Avoid?
Transferring your business to a child is something that should be thought about and planned for years ahead, regardless of how far away it is. Many people believe that since they won’t be transferring their business to their children until many years down the road, that this is something they don’t have to worry about right now. This could not be further from the truth. Accidents occur, relationships are harmed, and businesses change through the years. Planning for the transfer of your business now is the best way to assure a successful, smooth transfer to your children, regardless of what the future holds.
So, what problems does this help you avoid? We’re glad you asked. Most notably, businesses falter in the transition process due to estate taxation. When someone owns a business and does not pass it to their heir before they die, it remains part of their estate. When your estate is then passed on to your heirs, it is heavily taxed by the state, as New Jersey has both an estate tax and an inheritance tax. Depending on the value of the assets you are transferring will determine how much you are taxed. Unfortunately, many family businesses fall victim to this tax, as the heirs are unable to pay the taxes to the government in order to keep the business.
Other potential problems exist as well. Sometimes a lack of capable or interested successors exists. This may occur if a child is too young to run the business and no one is willing to step up and help until the child is of age. Lack of family teamwork can also prevent a business from surviving. For example, if a father with three son’s gifts 50% to one and 25% to each of the others, maybe the sons with the 25% are unwilling to assist in running the business out of jealousy and spite. This could lead to the collapse of the business if the son owning 50% is unable to run it by himself. A detailed plan of transition can assist any family business in avoiding these problems. It can put money aside in a trust to pay the estate taxes, name a successor, and help settle any disputes today, rather than down the road when the issues may harm the business.
One must view family business succession as a process, rather than an event. Putting together a plan today can ease the transition process later in life and ultimately help assure that your business will successfully pass to your children.
Please don’t hesitate to contact Fredrick P. Niemann, a New Jersey Business Succession Planning Attorney today toll free at (855) 376-5291 or by email at firstname.lastname@example.org. He would be happy to meet with you to answer any questions you may have or assist you in starting up your own business succession plan today.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Business Law Attorney