Is Your Family Business Ready for Ownership Succession?

Every family owned and closely held business must address the issue of ownership succession. It should be a priority action item for all owners. In these economic times, this is an imperative. While many owners who see their business as their retirement plan may not currently be able to sell their business at the price they want or at the time they want, our experience has shown that businesses with a credible succession plan are more attractive to buyers because it does not appear that the owner is required to sell, and lenders view the business as more stable.

Sometimes the owners are faced with clear cut choices as to who will take over their business and therefore feel that it is not necessary to focus on the process. However, if the owner merely transfers ownership and/or management of the business to the next generation without getting the business and the future leaders ready for the transition, the business may fail regardless of the good intentions of all involved.

With respect to turning over the business to the younger generation, the business owner should consider some key questions, such as:

  • Is the next generation qualified to run the business? Does he or she have the right “tools”, the right training and/or experience?
  • Is there more than one successor? If so, what will be the roles and responsibilities of each? Will ownership be equal? Will control be equal?

As a business owner, you would want the next generation to move into a business that has its documents in order. So you will want to address the following additional questions regarding the operations of the business:

    • Are the company’s governance records (e.g., by-laws, minutes, stock records) complete and current?
    • Does your company have an employee handbook that is current?
    • Are there valid employment agreements for key employees with enforceable restrictive provisions?
    • Do the loan documents permit the transfer of ownership?
    • Are the agreements with vendors and suppliers in place?
    • Are there agreements in place with key employees that give them an incentive to stay employed with the business, such as deferred compensation plans?

Is the business in compliance with leases of real estate and equipment? Do those leases permit a transfer of ownership or do they require the lessor’s consent?

  • Has the company taken proper steps to protect its intellectual property such as trademark, trade secrets, copyrights and patents? If some of the intellectual property is owned by the senior generation, is it properly documented? How will the business continue to use this intellectual property in its operations?

If you are the business owner, you might also wish to consider how the business will succeed with or without you. What role will you play in the transition? Will you continue to maintain an office on site? Will you remain on the board of directors?

Determining who will be the next owner(s) and manager(s) may be easy or difficult but you must consider numerous factors, some of which are outlined above. By addressing these questions, you give the new owner(s) and manager(s) and the business the best chance to continue to prosper. We have helped many clients pass the ownership and management of their business to the next generation and have watched as the business has continued to thrive. Please contact us if you would like our assistance through this process.

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