Tips for a Family Business Succession Plan
How to get your baby on board in OhioBy Judy Malmon, J.D. | Last updated on January 11, 2023
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Family Businesses Big and SmallFamily-owned businesses, where more than one member of a single family shares in small business ownership and operations, continue to be a major part of the American economy. While it depends how you define “family,” these business owners head companies that are thought to comprise as much as 60% of the U.S. gross domestic product and 19% of the Fortune Global 500. Where family is connected in this way, there’s often unique significance in sustaining a legacy. Equally, there may be desire in younger generations to forge their own path, or to cash out through a sale. Interestingly, only about a third of them make it to the second generation and about 12% make it to the third. Succession planning can fix that, yet only 23% of them are said to have one. Family succession planning is like estate planning for a business, and considers questions and decision-making like:
- What will happen to the business if current leadership is no longer managing the day-to-day operations?
- Will it continue? And if so, who will run it?
- Under what terms can it be sold?
- What will happen in the event of your death?
Legacy = Vision + PlanningIn approaching the succession planning process, Vergilii recommends a foundation of thinking through long-term goals and putting agreements in place. “The key is for that first generation, the ones who started the company, to create what they envision the legacy being,” she says. “Because if you leave it to the second generation, which is often the generation where a sale happens, it’s much more difficult to navigate.” In contemplating a successful transition, Vergilii identifies two primary protections. First, she advises that “getting a good buy-sell agreement in place between the generations is absolutely, positively vital. That will set forth who can control when a sale happens. The terms of the buy-sell agreement is the most important part of succession planning. “A close second,” she continues, “is making sure that there is ‘key man’ life insurance in place, so that if something happens, the funds are available to follow through on a buyout, and/or that money can be used to hire a CFO or president with really good skills, so the business doesn’t fall apart.” Business planning attorneys, like Vergilii, recommend that you consider these issues now, and that you revisit them regularly. “Just like an estate plan, your ownership and exit strategy should be a living document,” she says. “I tell my clients to think about this on an annual basis, because things do change. Just because something made sense five years ago, it may not still make sense.” For more information on this area, see our overviews of business organizations, closely held business and estate planning.
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