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Family business succession planning

Bruce J. Ackerman, partner.-(PASHMAN STEIN PC)

A key issue that is often overlooked for closely-held family businesses is succession planning. If the family does not intend to continue the business upon the death or disability of the owner, planning can be limited to considerations typical of other business sales.

However, if the family plans to pass the business on, either within the family or to a combination of family and key employees, the plan should begin to take shape many years before implementation is needed or desired.

The following is a list of steps that should be considered to properly plan for the continuity of a family business:

  1. Identify the individuals — whether family members or outsiders, current employees or others in a similarly situated business – who can own, manage and develop the business after the current owner is no longer active.
  2. Consider how to integrate those persons into the business while the owner is still active.
  3. The current owner should meet with each person involved in the family business to review their present and future roles, expected compensation and the manner for each person to attain an ownership interest or a management role in the company. 
  4. Consult the professional advisers of the business (accountant, lawyer, insurance and business specialists) for their input into the succession plan.
  5. Create a written succession plan.  Consideration should be given to the timing of the transition, including potential of a disability or other event that could prematurely prevent the present owner from continuing to lead the company.

  1. Along with a written succession plan, the company should make sure to have an entity document in place (a Shareholders Agreement, LLC Operating Agreement or Partnership Agreement, depending upon the company form). The agreement should provide for succession (buy-sell) on death, disability or other separation of an owner from the business.  Generally, life insurance can be purchased to fund a buy-sell on the death of an owner.  Disability buy-out insurance can be purchased for a disability buy-out although the cost makes its use less common than purchase of a life insurance for a death buyout. The agreement should also allow the company to purchase the shares of a divorced shareholder to prevent the shares from being transferred to that shareholder’s ex-spouse by court order.
  2. Each business owner should evaluate how business succession planning will fit into his or her own estate plan. How will younger family members already involved in the business succeed to ownership and management of the business? For a spouse and children not involved in the business, what provisions should be made so that they can inherit amounts substantially equal to those received by family members who are left a stake in the business.

For any closely held family business, it is essential that decisions on succession planning be made in a timely manner.  This requires not only an initial plan but also a regular review that allows for reconsideration over time as business events and life events change.  As with a business sale or acquisition, family business owners need to address family, tax, and estate planning issues and to re-evaluate these issues on a regular basis.

About the authors: Joseph L. Goldman, Louis Pashman and Bruce J. Ackerman are partners at the law firm of Pashman Stein PC located in Hackensack. Goldman heads the Trusts & Estates department, Ackerman heads the Corporate department and Kornitzer heads the Family Law department. They can be reached at 201-488-8200 or at [email protected], [email protected], and [email protected].

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