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Key Considerations in Your Family Business's Succession Planning

According to Forbes magazine, family businesses are responsible for 50 percent of the U.S. gross domestic product. Moreover, they account for 80 percent of all new job opportunities and make up 60 percent of all American jobs. Some 35 percent of Fortune 500 companies are still family firms.

Yet only 52 percent of business owners surveyed by PwC said they expect the next generation will -- or even can -- take over. Concerns about junior family members’ interest in and aptitude for running the company often keeps existing owners from undertaking fruitful business succession planning.

Yet, that planning sets the company up for a smooth transition -- and only about a third of family businesses succeed in making the transition to the second generation, according to Forbes. Careful planning can also minimize costly disruption to business operations and a potentially heavy tax burden.

While there can be a multitude of complex considerations involved in business succession planning, most of them can be worked out in five steps -- and heading to a succession planning attorney is actually step three.

  1. Determine your goals and objectives
  2. Agree upon a decision-making process
  3. Develop the business succession plan
  4. Create estate plans both for the business and the existing owner or owners
  5. Establish the transition plan

Communication is the key. Keep in mind that the interests of the new owner may not always align with those of a retired owner relying on it for continued income. There may also be misalignments among the interests of various family members, such as when an owner gets divorced and his or her interest must be divided in court.

Division of ownership and financial interests in the company can be a challenge, and that requires an accurate valuation of the business. Then it must be divided, often through a buyout agreement, which could mean a straight-cash payment or an earnings capitalization interest.

Finally, if you don’t establish appropriate estate plans both for the owners and the business, you may end up paying undue taxes, and the business and the new owners could face probate-related delays.

Have a serious conversation about business succession, perhaps especially if you’re not sure of what the ultimate result may be. You owe to the business you’ve worked so hard to build.

Source: Forbes, “5 Steps To Create A Viable Succession Plan For Your Family Business,” Michael Evans, Aug. 28, 2013

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