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A Better Family Business Succession

Posted by: Today's Tip Contributor on June 16, 2011

You own a successful family business. It’s time to plan for the next generation. Remember, one out of three family businesses fails in the second generation and the figure is even more distressing in the third generation. Consider the following situations and apply my advice where it fits.

1. You own the business with your sibling (or another family member) and members of the next generation from both families are active in the business. The situation is comparable if you own the business yourself and more than one of your children is involved in the business and capable of running it. In either event, it is generally wise to identify who in the next generation is most capable of running the business. Because it is always difficult to split leadership, you must take proactive steps to work out ownership interests and rights to management, possibly using such tools as trusts, buyouts, and annuities to ensure an equitable distribution of assets.

2. You own the business yourself and you have three children, none of whom is involved or interested in the business. You likely will want either to sell the business during your lifetime or bring in an outsider to run the business during your life, with a buyout upon your retirement or death. The buyout, properly structured, can also help provide for your family after your retirement or death.

3. You have more than one child, but only one is involved in the business and is qualified to run it. In this event, business succession is fairly straightforward. The more difficult issue is—assuming you want to treat your children equally—how do you leave the business to one child and provide equally for the others after death? Consider life insurance, trusts, buyouts, and other tools.

There are many variations on these scenarios and just as many ways to deal with each of them. The first requirement is that you deal openly and honestly with your children (and your co-owner’s family, if applicable). Open communication allows you and your family to plan properly in a way that will minimize disruption to the business and the family and at the same time allow you to take advantage of available tax provisions. Consult your professional advisers and be honest with them as well.

Louis Pashman
Pashman Stein
Hackensack, N.J.

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