Those who own a family business are wise to take steps to protect the future of the business. The following tips can help those who run a family business better ensure it passes in accordance with their wishes.
#1: Get documents and instructions to effectuate the transition
It is always helpful to have a business succession plan. This can include guidance for the succession of management and business operations. Depending on the details of your business, it can be best to transfer the business to family through a trust or with use of a specific business entity like a family limited partnership.
For some, a buy-sell agreement may suffice. This document can include a provision that explains upon the death of any owner, the business interest will transfer to the other, remaining owners. This is particularly useful in business arrangements where management is intended to remain with the family members who are already serving as business owners as opposed to shifting to other beneficiaries like a spouse or children.
#2: Protect the business from unwanted owners
Interest in the business can be passed to unwanted parties if action is not taken to protect ownership. One common example: divorce. A failure to protect the business from divorce can result in business owners forced to do business with a family member’s ex-spouse.
There are several ways to avoid this potential problem. A pre- or post-nuptial agreement is one option. Although this agreement will help to protect the business, it may not protect the value of the business from a potential divorce. The individual getting a divorce may need to give up other marital assets of similar value to keep full ownership of the business.