The statistics for family business succession are less than encouraging: Less than a third of all family businesses successfully transition from first generation to second generation, and less than a third of those eventually transition to the third generation. One cause is that many owners do not have a viable business succession plan in place.
Family businesses come in all shapes and sizes. Some are multi-generational with all or some children and/or spouses active in the business in some capacity. Some owners have no family members that are ready to take over. Some do not have any family members that are interested in taking over the business. The point being that there is no one plan that works for every business. Each family business must consider the specific situation of the family and the business and decide what is best for them. However, regardless of the specific situation of the family and business, all owners must do advanced planning with respect to management and ownership succession and get an estate plan in place to implement those plans if they want to give their business its best chance at surviving the transition to the next generation.
Who Will Take Over?
This is obvious, but a lot of owners don’t take the time to think about management and ownership succession. It sounds simple in theory to leave the business equally to all your children, but if some or all are not interested or capable of managing the business, this can be the business’s demise. It is crucial to think critically about whether anyone in the family is capable of taking over the management of the business, and it is equally crucial to have open and honest discussions with the family to determine if anyone is interested in the same.
How To Make It Legal
Once you have an idea of who you want to take over, you need to work with an attorney to implement your succession plan. This will involve: (1) getting an estate plan in place; (2) discussing and addressing any potential tax implications of the transition; and (3) getting a buy-sell agreement in place if there are multiple owners to address certain events like an owner’s death, disability, divorce, bankruptcy, or an owner that wants to sell an interest in the company.
As an owner of a business, it can be difficult to contemplate that you will not always be the owner of your business and eventually someone else is going to have to take it over. However, taking the time and energy to plan for the future of your business is necessary to ensure its continued success, and the earlier you start that process, the better.
Karlee Williams joined Martin Pringle in 2019 after clerking with the firm for two years. Karlee completed her undergraduate degree at Kansas State University and went on to earn her J. D. at the University of Kansas School of Law. She focuses her practice on business & entrepreneurial law, tax law as well as estate planning including estate administration and probate.