Will Your Business Die With You?
Originally published: 06.01.06 by Mike Coyne
Strategies for leaving your company to family members.
My son and I have worked side by side in the family business, and due primarily to his efforts the business has more than tripled. This business is my major asset and I plan to leave it equally to both of my children. My son says that if I plan to leave the business (which he built) equally to him and his sister, then he will quit and become my competitor. He said he doesn't want to spend a lifetime building a business which will be half owned by his sister.
The above scenario is so very common. Approximately 90% of the businesses in the United States are family owned. Unfortunately, studies show that 2/3 of family businesses fail to survive into the second generation. Although owners often spend a lifetime building their business, many neglect to plan for its transfer to their successors. This failure to adequately plan for management and ownership succession is a leading contributor to the low survival rate. Many people equate succession planning with estate planning. Others believe it is another form of strategic planning. Neither view is entirely accurate, although estate planning and strategic planning are integral parts of any business succession plan. Succession planning is much broader. It is the development of a strategy for the transfer of the ownership, management, and philosophical responsibilityof the business, typically from the parents to their children.
A business owner with several children may face toilsome decisions, especially when ownership of a business represents the bulk of the owner's estate and some ofthe children are active in the business while others are not. In such cases,the goal of the owner is usually to transfer the business to the children who participate in the business without being unfair to the other children. It may take considerable planning to achieve a fair and equitable distribution of the owner's assets among the children in such situations. The owner may also be faced with a situation where all the children are active in the business or all children are inactive.
Most parents want to treat each of their children fairly when dividing up their wealth. Often, they equate fairness with an equal distribution of their property among their children. Providing an equal distribution of property to each child maybe difficult to achieve when the bulk of their estate is comprised of a closely held business.
Faced with the competing goals and interests of the business owner, surviving spouse, and each of his or her children, there are many transfer options available, such as transfers of existing non-business assets, transfer of other business assets, use of life insurance to equalize overall transfers, re-capitalizations, installment sales, spin-offs, and gifting plans, to name a few. Most often such planning takes the coordinated efforts of the business owner, his or her family, accountants, financial planners, insurance agents, and of course attorneys. Be sure to adequately plan. Don't make a hasty decision that could cause a rift between your children (and possibly grandchildren) for many years to come.
Michael P. Coyne is a founding partner of the law firm Waldheger Coyne, located in Cleveland, OH. For more information of the firm, visit: www.healthlaw.com or call 440.835.0600.
Articles by Mike Coyne
Spotting Legal Land Mines in Your Social Media Campaign
Your responsibility extends to third-party contributors such as customers and friends.
4 Ways To Avoid Discrimination Claims Related to Hiring
Be aware that a person can sue you even before they become an employee.
Hiring a Veteran Has Benefits
As the United States brings home soldiers from the Middle East, military veterans comprise a larger percentage of the labor pool. A number of government programs have been implemented to provide incentives for employers to hire veterans, and special incentives are available for employers who hire disabled veterans. Is this something you should consider?
Address Texting-While-Driving Head On
This theory of liability applies when employees are acting within the scope of employment or for the benefit of employer.
Keep Corporate Debt Separate from Personal Debt
If you are operating your business in corporate form, it is important to follow formalities. You should sign contracts in your capacity as an officer, and contracts should always be between your corporation and the other party. You should never be named as a party to the contract.