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Family Owned Business Succession Planning or Leaving a Probate Mess – Your Choice

By Howard C. Stross
March 17, 2015

Family owned business succession planning is a choice; not doing it at all or biting the bullet and facing the hard questions before there is a need to do so. We may not have a choice about how we enter this world, but we can decide how we exit it. There are two options for family owned business owners. They can leave a positive legacy with a planned exit for the future of the family owned businesses they built over many years.

This is the first post in a series on family owned business succession planning. Much of what is discussed herein applies to the closely-held business, meaning the owners have agreed not to transfer their percentage of the business ownership without the written approval of all or a majority of the other owners. We will discuss some of the options a small business owner may have to exit the family business and leave a proud legacy.

There are three steps to a successful transfer or sale of any business. Design an exit plan, implement the plan and know the follow-through needed that will lead to the present owner’s eventual retirement. The plan must include a blue print of what will be done and who will see that it is implemented if a family run business owner becomes mentally or physically incapacitated or dies while owning all or a portion of the business.

This article focuses on the Key Employee, the person who often steps up to operate the business services in times of crisis or buy a business (the “Key Employee”). The Key Employee might be a child, or other relative of the family run business by blood or marriage, or a long time employee who is not a relative. The Key Employee may have proved his or her loyalty and influenced the growth or stability of the family owned business. It is essential to the family owned business owner’s financial protection that the Key Employee be incentivized to stay with the family business, continue to lead in its growth, and eventually it.

When The Key Employee is a child of the family, one problem may be that the business owners/parents have two other children. They want to transfer the business ownership to that child, but there always seems to be at least one catch. Perhaps the other children have no interest in the family business. They may have never worked in it. The parents want to be fair to all of their children. They wonder if leaving one-third of the family business to each child, forcing the Key Employee/child to purchase two-thirds of the business from the other siblings. The business the child worked in for years, perhaps at a lower than competitive wage, provided substantial help in creating wealth in the family business. The parents are mindful that their Key Employee/child is also important to their financial well-being in their retirement years.

The first step in this exit strategy is to compose a written statement with their income and life-style goals for their retirement from the family owned business. The statement should describe what their retirement will look like when they exit the family business. After doing so, the remaining parts of their plan are the steps the business owners will take to achieve those goals (the “Exit Goals”). The steps toward the achievement of the Exit Goals will be described in subsequent articles in this series.

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