A family business can become a large part of a family’s identity, intertwining professional and personal life in many ways, as well as positioning the family through its business in the local community’s life. Being such a focal point, a family business should have in place a solid succession plan that will kick in when the first generation owner or owners decide to retire or move on, or in case of their disability or death.
That succession plan would determine how business management would function during and after the transition, as well as what ownership changes would look like. Ideally, succession planning begins as early as when the business is created.
An entrepreneur in setting up his or her business should work with an attorney who can provide information and advice to help the new business owner choose the ideal legal entity (sole proprietorship, partnership, limited liability company or LLC, corporation or another) for the business. The business entity choice will impact the ease and method of transitioning the particular type of business to new management and ownership eventually, if the plan is that the business survive the initial owner’s involvement.
However, many businesses do not consider succession planning initially and it is never too late to begin that plan. Of course, sooner is better than later so that unexpected events do not create difficult circumstances within the business.
Sometimes internal family conflict or difficult issues make communication about succession challenging, which may cause succession decisions to be put off. Open communication among family owners, other close family members and nonfamily managers and owners can go a long way toward resolution and problem solving of such issues, which will allow the actual plan to be established.
Here are some of the things to consider in creating a succession plan:
- Will the business survive the departure of the initial owner or will it be wound down? What will happen to company assets and debts and who will be the recipient of remaining capital?
- If it will continue, who should run the business after the owner retires, becomes disabled or passes away? Should management be by family members, existing employees or new hires?
- How will ownership of the company change?
- Do close family members want to be involved? Do they have the necessary skills? If an owner’s spouse or children will not be involved in running the business, will they still own part of it after that owner is not involved? Will financial support for them provided?
A real example
The Free Lance-Star provides an interesting example of a moving and storage company that has had family involvement for four generations and touts its succession planning that is based first on business decisions, then on family matters. That article describes the strength of bringing in younger members of the family with the technical and digital skills today’s young adults bring with them that will help to modernize the company’s market and online presence, reaching newer, younger customers.
Anyone involved in a family business who needs to set up or modify a business succession plan should seek the legal counsel of a lawyer to provide advice on practical and legal issues in succession planning and to draft necessary documents to carry out the plan of choice.
With offices in Galveston and Houston, the attorneys at Mills Shirley LLP, the oldest law firm in Texas, advise and represent Gulf Coast clients in forming new family businesses and creating and carrying out business succession plans.