Family businesses have issues that are very different from those of larger firms, and one of the most important of those issues is figuring out how to take the success of the first generation of entrepreneurs and safeguard and institutionalize it so that
Transferring a family business is a legal, financial and emotional tangle. Family businesses do not tend to outlive their founders. At any given moment, 40 percent of family businesses are in the process of transferring their ownership. Unfortunately, two-thirds of all initial transfers fail. Of the one-third that survives an initial transfer, only one-half will survive a second transfer.
A recent article in Financial Planning highlights some of the issues, and offers a few possible strategies, to include:
- Strategies to divide assets, or remove them from the business, in order to equalize the family estate between siblings who do and do not participate in the business;
- Drafting (and funding) a Buy-Sell Agreement to specify how children who work in the business can buy-out the ones who do not.
- Recapitalizing and Establishing an S-Corporation. This may be a good strategy for situations where one of the owners (Mom or Dad) does not want to give up current control, but does want to pass on the value of the business in a tax-efficient manner.
- Defective Trusts. Sale of the business to an intentionally defective grantor trust may lock in the value of a business that is appreciating and eliminate one level of taxes.