3 Ways to Legally Plan for Your Family Business
Family businesses are some of the longest-lasting, most productive businesses in the nation: The average lifespan of a family business is about 24 years. Nearly 30% of family-owned companies transition into a second generation and account for approximately 64% of the nation’s GDP.
But no matter how productive or efficient itis, every business needs legal attention, and family businesses are no exception. Failing to provide this necessary legal attention and keep everything in writing can spell disaster down the road.
Let’s look at how you can legally plan for your family business to avoid pitfalls and keep your business thriving for years to come.
#1 – Create a Succession Plan
Creating a succession plan is one of the most important things that a family-owned business can do: A succession plan designates, in writing, who will take over a vacant leadership role of the company should the current owner of that position resign, retire, pass away, or leave the business entirely.
A well-written succession plan will keep your family business intact for as long as possible and provide clear definitions of other legal considerations that may arise after that business’s ownership roles are transitioned.
For example, will the CEO be asked to stepdown from the board after retirement? Will this retiree retain profit and/or capital interest in the company? What about others within the family’s older generation who will also eventually retire?
These questions and more are answered in your family business succession plan. Working with an experienced succession planning attorney is advisable to make sure it’s done right the first time.
#2 – Create a Buy/Sell Agreement
Otherwise known as a shareholders’ agreement or a buyback agreement, a buy/sell agreement dictates what happens to a partner’s ownership share of the company after a partner resigns, retires, passes away, or leaves the business.
Your family business’s buy/sell agreement will designate whether the remaining owners and partners of the company or the entity itself will be responsible for buying back the ownership shares of the departed partner.
A buy/sell agreement will clearly define a list of events that legally trigger the buyback, a list of those responsible for buying back the shares, a funding plan the remaining owners can use to execute the buyback, and an up-to-date valuation of the company.
Two primary buy/sell agreements exist: a cross-purchase agreement and a redemption agreement. Working with an experienced business contract attorney will help you to determine which is best for you and your business.
#3 – Create a Family Business Agreement
While it’s essential to plan for the what-if of your family company’s future, it’s equally important to prepare for your concern's healthy operation and existence in the present. This is where the family business agreement comes in.
The family business agreement outlines, inwriting, how the family is expected to operate the business. It also establishes:
- A family code of conduct, which designates how values and morals are included in the business’s everyday functionality.
- Task and role definitions designate who will do what, when, where, why, and how.
- An advisory board and family council. The former is a board of outsiders responsible for providing unbiased advice to the family business. At the same time, the latter comprises family members accountable for keeping all family members with a financial interest in the company up-to-date and taking input about the business from interested family members.
A well-written family business agreement will ensure the successful operation of your family business, even when obstacles arise.
Protect Your Family Business With BMC Estate Planning
BMC estate planning can help you, and your familybusiness lay out the legal work so you can focus on doing what you love instead of worrying about liability and legal what-ifs.
Getting in touch
Borenstein, McConnell & Calpin, P.C. is a Wills & Estate Planning law firm serving Central and Northern New Jersey, as well as New York City. We strive not only to give you a great client experience, but to become your trusted adviser for life. To reach Alec, please send an email to email@example.com.
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