Planning the Future of the Family Business in New Jersey
Are your kids really the best choice to take over the company?
on April 24, 2018
Updated on August 29, 2022
Family-owned companies continue to be a major component of the American economy. They comprise roughly half of the U.S. gross domestic product, including 35 percent of Fortune 500 companies. Of course, with a family business, there’s often unique significance in sustaining a legacy. However, only 23 percent of family-owned businesses have a documented business succession plan, and scarcely one-third successfully survive a generational transfer.
And while part of what makes joining with other family business owners a strong business model at the outset is the inherent longer-range vision in anticipating succession to the next generation, this can also present sticky scenarios: Adult children may not be interested in carrying on the family legacy, and siblings or cousins may have differing participation and desires.
“One of the most important things I advise clients is to be very realistic about their specific situation,” says Hackensack business attorney Miriam Hermann, of Ferro, Labella & Zucker, “particularly whether their children are really the right individuals to take over the business.”
As with any family, there can be topics that are hard to discuss. One of the more complicated aspects of deciding on the family business succession plan is how it overlaps with distribution of the owners’ estates. “It’s good to have clients confront it, in a collaborative way,” says Hermann. “I have a partner who is an estate planning attorney, and often you want to look at these situations from both a business and an estate planning perspective and try to be creative.”
For example, “You may have siblings at the parent level, who have been running the business but don’t always see eye to eye about their future plans,” says Hermann. “Or, you may also have a situation where one sibling’s family is local, and they’ve brought their adult kids into the business and they’re interested in seeing it remain in the family, while the other sibling has kids who live across the country, with no interest at all in staying in business.”
When this happens, interests can diverge with respect to the next generation of business operations. “You have to recognize that one child may have put their blood, sweat and tears into the business and may be entitled to something more than other children, but not so much that it is inevitable that your kids will have an all-out war on the death of the parent. Unfortunately, where money is concerned, it can get ugly,” she says.
The best way to proceed is to maintain an ongoing discussion about goals and outcomes, while drafting documents to protect both individuals and the business. “An operating agreement setting forth who’s managing the business and what their roles are is an important planning tool,” says Hermann. “It will include buy-sell provisions, so there’s a mechanism for family members to be bought out on their parent’s death or retirement, as well as a basis for valuation.”
It’s also possible that the best outcome is that the business not remain in the family. Hermann also works with her clients to assess alternate planning options, such as finding an internal succession candidate in a key employee, or pursuing sale of the company to a third party.
As with estate planning, there are definite advantages to planning ahead. “It is best while people are still alive and active in the business to amicably set up a plan,” says Hermann. “We encourage our clients to talk about this before it’s too late.”
To put a plan in place for your family-owned business, seek legal advice from an experienced business planning attorney. For more information on this area of law, see our overviews of closely held business and business organizations.