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3 Things Businesses Should Know About . . . Common Mistakes Made by Family Business Owners

 Many family business owners work a lifetime to create a valuable business. Without proper planning, this life’s work can be lost through retirement, disability or death.

While taxes have taken the headlines and the blame for failures in family business succession, they are rarely the main culprit. Many issues can be corrected or at least tempered by avoiding three of the most common mistakes.

1. Failing to Pick a Successor.

A plan that transfers your interest in your company to a spouse or equally among children is rarely a good succession plan. For instance, is there a child who puts more time into the business and who ultimately is the “go to” person when a decision is to be made? Should he or she own a controlling interest in the family business? What if there is a key employee who is not a family member? Maybe it is your partner’s son or daughter who is the key person? Is there a plan that prevents your partner from selling or transferring such partner’s interest to someone you do not want as a partner? Have you discussed your plan with your family? What does your family want? In any case, it is important to plan so as to avoid a “fire sale” when a crisis develops.

Strategies can be put into place so that control is held by the right person with the value of the business being divided in a different fashion. Maybe day-to-day decisions are left to be made by a few while major decisions require a larger group. Voting trusts, shareholders’ agreements and non-compete agreements are some of the many tools available to plan a smooth succession.

2. Failing to Provide an Exit Strategy.

Partners or shareholders need to have a way out. Divorce, retirement, disability, taxes, death or changes in the family or business cycle put pressure on those individuals in a family business that are looking for liquidity. If the business is not traded on a public exchange, how does someone ever cash out? What is the business worth? Buy-sell agreements can be designed so that those who want to retain the business and those that want to cash out have a way to work through these challenges. Formulas to create a “fair price” and funding mechanisms can be put into place so that the business or the owners can pay the purchase price. The adoption of these types of agreements and an established process often provide the keys for not only the business to survive but for the family itself to survive such a transition.

3. Failing to Plan for Tax and Liquidity Issues.

“In God We Trust, All Others Pay Cash!” While the estate tax issues are debated, your interest in a business could be exposed to a huge tax liability at the time of death. Plans must be made to pay the estate tax if and when it is due. In addition, proper planning can avoid or at least reduce this tax bite.

Other liquidity issues put pressure on a business as well. After all, a stock certificate that shows value on paper will not pay for your child’s college or fund your retirement alone.

These common mistakes often surface without warning, creating a crisis for the family business and its owners. In many cases, the family business is the key to the financial security of one or more families. Planning in advance for succession issues is the key to the continued success of the family business, its owners and the family itself.

To learn more about Mark H. Oppenheimer and his practice, please visit his profile.

  • Partner

    Mark is a partner in the Louisville office and is a member of the Estate Planning and Business Services Departments. Mark concentrates his practice on business succession, estate planning and estate administration for ...



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