Family-owned business exit planning is like making a gameplan for the future. It’s all about figuring out how to pass on ownership and management of the business to the next generation or an appropriate party while making sure it stays successful in the long run. Some of the key components to exit planning include goal setting, financial planning, legal and tax analysis, continuity planning, and succession planning. These steps can be simple or intricate, depending on your style and comfort level, and could involve professional advisors if there are skills that you need to gain in your background. At a minimum, core values and a mission statement should be contemplated.
There are unique challenges where a business is family-owned, or several members of the family are involved in operations. There may be sensitive family dynamics or conflicting interests. There may be obstacles stemming from legal structures to practical considerations. Expect the unexpected in situations where formal rules and record-keeping are eschewed.
The Importance of Early Planning
Like in most areas of life, early planning is crucial when transitioning out of a family-owned business. It is essential to discuss exit plans with family members to align expectations. Starting the conversation early removes some of the time pressure from the situation. It allows for thoroughly assessing family dynamics and evaluating family member interest and capacity in taking over the business. It is useful at this stage to talk to non-family employees. This is particularly true if selling the business to the employees is a possibility. If potential successors have been identified, it will bring value to speak with them about what their plans are and to assess whether they are interested and capable of stepping in. This would be valuable in creating a shortlist of candidates.
Legal Entities and Structures That Facilitate Family Transitions
Care should be taken during the business setup and maintenance to promote organizations and configurations that will allow for simple transitions at the appropriate time. As we have discussed in other blog posts, wills, trusts, and other estate planning tools can be customized for family transitions.
These legal instruments and other legal tools can be used to manage the business’s tax liability. It is crucial to implement strategies early on that can minimize the tax burden. Otherwise, it may be impossible or costly to restructure to avoid tax penalties or increased taxes. Tax laws are complicated and change frequently, making it crucial for businesses to manage their tax liability actively. We will help set up a plan using tax-advantaged investments, credits and deductions, exchanges, and harvesting to manage tax liability, minimize tax burdens, and optimize overall financial performance.
Exit strategies might include transferring the business to a trust, selling it to a new owner, getting acquired, liquidating the company, etc.
Steps to Create a Comprehensive Succession Plan Focusing on Leadership and Ownership Transition
Developing a succession plan is critical to meeting the succession goals of relevant stakeholders. A plan should be written, and the business owner’s goals for leaving the business should be outlined. Typically, it is vital to prioritize the leadership of the organization to avoid a drop-off in financial performance as family members depart. Similarly, new ownership should be ready to step in and provide oversight and direction with great speed. The next generation should be eager to succeed the outgoing team and family members and directed to resources to close any gaps in experience or skills. The organization should take care to carefully navigate the integration of new family and non-family members into the existing business structure. If possible, the owners should select a successor.
Establishing Governance Structures
The transition can be an opportunity to improve governance structures if needed. A clear sense of the role of family councils, boards of directors, and other governance bodies in decision-making processes goes a long way in ensuring business continuity. Nature abhors a vacuum, and the tragedy of the commons occurs when everyone thinks that everyone else is taking care of decisions. To avoid that, clear organizational mapping is necessary. It may be necessary to have guidelines or limits, either minimums or maximums, on family input relative to professional management practices. Some families may want the freedom not to be involved, others may want “noses in, fingers out,” while others may want the same level of input they previously had.
Strategies for Managing Disagreements and Conflicts Among Family Members
In business, just as in social settings, it is helpful to anticipate and resolve conflicts between family members or between family and employees or partners. Having conflict resolution mechanisms in place before they occur is very important. It is not advisable to make up the rules as you go. Informal mediation or seeking assistance from the human resources department or vendor can be helpful.
Focus on Family and Share in Success
Only 1 in 3 business owners have sought the advice of estate attorneys when moving toward family-owned business exit planning. Our skilled legal professionals at Lowthorp Richards aim to empower your family-owned business with maximum opportunity for its post-business experience. We will provide legal advice to fortify your family’s wealth, enhance its well-being, channel assets to the chosen beneficiaries, and mitigate potential risks and expenses. We stand ready to assist with any inquiries, offer sound legal counsel, assess your estate planning, and tackle any necessary tasks to propel you forward.
Contact the dedicated team of attorneys at Lowthorp Richards for trusted guidance in digital asset management and estate planning by dialing (805) 981-8555 or completing our convenient online contact form. Our legal practitioners are deeply rooted in the California Tri-Counties region, serving Ventura, Santa Barbara, and San Luis Obispo.