Family Business Planning
Trying to keep a family business “in the family” for the second generation or beyond, can result in either a wonderfully satisfying experience, or it can cause irreparable discord among the family members, and litigation. According to the Family Business Institute, only about 30% of family businesses get transferred successfully to the second generation, only about 12% to the third generation, and only about 4% beyond the third generation.
Clients who start a business typically wear the hats of both the entrepreneur and the manager. That is a tough combination to master. However, the process of transferring the business to one or more family members can sometimes prove more daunting than starting the business and managing the business.
Many family business owners believe they can coordinate the transfer of the family business themselves or with one or more of the same professional advisors who have assisted them during the duration of the business itself. Often times, this assumption can prove disastrous. To thoughtfully plan for the devolution of a family business, prudent business owners should consult with Sanger & Molever.
Their Palm Desert family business planning lawyers have seen common mistakes made in planning for the transfer of family businesses. The mistakes can be categorized as follows: (i) not having a plan at all; (ii) not building the right team of professionals; (iii) not anticipating and analyzing the tax implications; (iv) not balancing control of the business with the ownership of the business; (v) not formalizing a complete business succession plan, and (vi) not establishing or revising an estate plan to account for possible inequities due to the transfer of the family business.
And, the worst mistake of all that our Palm Desert family business planning lawyers have witnessed: the business owner leaving the business devolution planning until he is terminally ill, and there is no time to thoughtfully plan for the transfer of the family business.
Example: Husband and wife owned a lucrative Lexus dealership. H&W had two children, a son that worked at the Lexus dealership for 20 years and was the general manager of the Lexus dealership; and a daughter, an RN, that worked at a hospital in another state. H&W left everything equally to their children. Following the parents’ deaths, the RN daughter started to receive deminimus dividends from her 50% of the Lexus dealership stock, and she noticed the Lexus dealership was paying her brother a $300,000 minimum annual salary; was paying her brother’s wife another $150,000 salary; was giving her brother, his wife, and their two children rent free use of new cars, and an expense account of another $50,000. The daughter demands equal sums, or threatens to file a legal action to dissolve and to sell the dealership. To avoid such internecine family litigation, the parents’ estate plan might have split things 50-50, by giving 100% of the dealership to the son, and 100% of the equal-value real estate on which the dealership sits, to their daughter (for which she will receive FMV rent monthly).
If you have a family business with some children in-the-business and others not in-the-business, if you wish to mitigate the likelihood of family litigation, you should consult our lawyers for a thoughtful estate plan, and not just a canned A-B-C trust.
If you need help focusing on the transfer of a family business, the Palm Desert Sanger & Molever law firm can help you explore options that might preserve both the family business, and a positive relationship of your heirs. Howard Sanger and Jeff Molever have experience in these family business transfers. Let them help coordinate your efforts.