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Nov 19, 2009 -

You've got a thriving small business that you started with your own grit and pennies, and now you have children who are reaching the age of adulthood. It's time, like it or not, to think about who will run your business when you no longer can. "Many times, a business that is financially sound suffers because the owner did not plan for what’s going to happen upon his or her disability or death," says Jeffrey Asher, an estate planning attorney and partner with New York City-based Eaton & Van Winkle LLP.

No one wants to think about the inevitable, but when it comes to succession planning for a family business, there are a lot of sensitive details to consider. Do your kids even want to run the business and are they capable of doing so? What if neither kid wants the business, or what if the kids want to run it together but you're worried they will fight and ruin it? It's critical to make sure that everyone is clear on the objectives of the succession plan, writes Don Schwerzler of the Family Business Institute:   “The family succession plan  should include strategies to put the business interests ahead of the family interests and should emphasize merit over family position."

Here are a few scenarios for family succession planning, and how Asher handles the issues with his clients:

1. One child wants the business and is capable of running it, but the other siblings do not.  Asher advises that the business owner equalize his assets as best as possible. For instance, if the child receiving the business will inherit a $5 million asset in terms of business value at the time of your death, then, consider giving the other child a $5 million life policy. But here's a caveat: cash (a.k.a. the life insurance policy) has no potential to increase in value unless you do something with it, such as invest it. Whereas, the business will likely increase in value over time. "If you want to focus on value, then you have to admit that giving a business to one child and life insurance to another will not be equitable after 10 years."
2. All children get equal assets in the business. You will need to determine with your kids how the management of the business is going to happen. Will they all be involved in the business or will one child only have a financial interest? That will have to go in to writing, if so. If the kids decide they want to run the business together, count on conflicts happening. "So many times I have seen siblings at each other’s throats after the parents are gone," Asher says. He advises assigning a board member or other third party to serve as a co-trustee to help mitigate conflicts between siblings. Alternatively, if you deem the risk too high for the kids to run the business together, you can place the business into a trust which is managed by a bank or lawyer or team of people. "That way the younger generation gets the economic interest without governing interest.”
3. You sell the business when you're ready to retire, or make provisions to allow your kids to sell it. Deciding when and if the business can be sold is very important. Some business owners will make provisions in their will that the children cannot legally sell the business until a period of time has passed, such as five years. Regardless, there's no guarantee that your kids will be able to find a solid buyer for your business while it still holds value.

Of course, if none of your kids want the business you will need to determine if you have a trusted friend, colleague, or cousin who can take over the business. Beyond the basic succession options, there are a host of variables that can come into play when you're no longer in the picture. In some industries, especially retail, Asher warns that vendors and buyers may resist dealing with anyone but you because they associate the business strictly with you, the original founder and owner and their friend. “And then the business suffers and that is the parent’s failure for not setting up a transition and bringing Junior around to all the partners and customers and vendors."

Here's another tricky situation: What if the spouse of one of your kids wants to get involved in the business later, against the wishes of the other siblings? The earlier you can plan and the more conversations you have with your family, the more prepared your kids will be to mitigate such conflicts.

Consult with your accountant and attorney to help you work through the process: a third-party can make the planning process more objective, less stressful, and more thorough. The aim of business successful planning?  "You want to make sure that the business goes down to your loved ones at the lowest cost and for the highest value," Asher says.

However you go about it, don't wait to start planning. "The reality is that most of us will have some sort of disability before we die, and the longer you wait the more you will increase the chances of not being involved in the decisions. Too often, business owners leave a legacy of conflicts because they never plan this out."