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Family Business: Leave a Legacy or a Mess, Your Choice – Part 2

By Howard C. Stross
April 29, 2015

NOTE: If you have not read Part 1 of this series, please do so before reading this Part 2.
Click here: Family Business Part 1.

If a Key Employee is the person being groomed to take over the family business and that person is a family member, paying attention to family considerations is critical if transferring the family business is to succeed. The first question to address is whether the Key Employee has already paid for a good portion of the business by working extra hours over a long period, taking on risk to his or her career, and receiving or continuing to receive lower than competitive compensation. If so, any reduction the owners make to the purchase price may not be viewed as a gift. A reduction in the purchase price and terms of purchase could be viewed as acknowledging the Key Employee’s contribution to the success of the family business sustained over many years.

Whether the Key Employee is a family member or unrelated to the owners, it is critical to retain the services of the Key Employee because consistency of operation is fundamental to ownership transition. There are many ways to motivate a person to stay on. Three methods I have observed that serve to increase the probability the Key Employee remains with the family business are briefly discussed below.

Salary Continuation Plan With a Contingent Bonus. This is a written contract where the Key Employee is promised full salary for a certain time period, if he or she remains with the business for that stated time. There may be variables thrown into the mix to add to the motivation. A Key Employee may receive with the salary and fringe benefits a significant bonus to remain with the business for a period of time, say three years.

Enhanced Compensation Plan. This may be in addition to or instead of a bonus. Enhancement may include additional weeks of vacation per year, a company car, increased retirement benefit or incremental salary increases.

Retirement Plan. If the Key Employee wants to retire and this person’s services are critical to the family business, possibly the Key Employee could pare down his or her working hours. An agreement could be drafted that provides for this person to work, say, four days a weeks beginning on a certain date, then later go to a three-day week, and so on until he or she works only on special assignments, and then finally retires.

If the Key Employee, family member or not, sincerely understands that he or she is valued, and is not losing his or her job or the position he or she held for years, the family and the Key Employee are then empowered to concentrate their collective efforts on achieving the objectives of the family business.

If you own a business or have a family owned business, and don’t have a succession plan in place, contact Howard Stross at (813) 852-6500. He can help you understand your situation from a legal perspective and guide you to a solution than makes sense for your retirement, your asset protection and your estate tax.

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