Patricia Galteri and Jayson J.R. Choi

It’s hard enough running a family business—keeping family members from overreaching or competing, duplicating tasks, or entertaining thoughts of killing one another. And even when there is relative harmony, the owners of family-owned or closely-held businesses are busy running their companies, not planning for succession (many don’t even like to think about turning over the business, truth be told).

But amid the many successes and daily challenges, it’s vitally important that family-business owners—there are 5.5 million of you nationwide—plan for eventual succession and the disposition of their businesses at retirement or death.  It’s easy to put off such planning, especially with the drama of family dynamics in the picture, with emotions often running strong and deep.  However, if families don’t plan for succession, the results could be disastrous for the business—and its owners.

Consider this all-too-common scenario as an example of what could happen:

Grandpa starts a manufacturing company in the 1940s.  His two sons, Dad and Uncle, grow up working for the company, and when Grandpa dies, they become 50/50 co-owners. The company prospers.

Dad is the savvy businessman; Uncle is the lead salesman and “face” of the company. Dad and Uncle generally get along, but Uncle and Dad’s wife, Mom, have a frosty relationship. Then there are Dad’s kids, one son a capable CPA, and a daughter who’s a doctor, but nevertheless is put on the company payroll.

Unfortunately, Dad suffers a heart attack. So he asks CPA Son to join the company as CFO, with hopes to have him succeed him, starting with 20% ownership of the firm. The son comes on board—but there is no written agreement. Unfortunately, Dad dies unexpectedly before he can make CPA Son a 20% owner of the company.  Dad’s will passes on his 50% interest in the company entirely to Mom.

There is no shareholders or buyout agreement between Dad and Uncle, nor has there ever even been a valuation of the company.

Meanwhile, Uncle does not want to give want to give 20% of the company automatically to his CPA nephew, and he surely doesn’t want him to be in a management position. No way.  Besides, he has a bright daughter about to graduate with her MBA in eight months. That’s when the trouble really starts to brew… and the harmony transforms into harsh discord.

Because of this family feud, and Dad and Uncles’ unchanged 50/50 ownership, the company is deadlocked, facing potential litigation and dissolution.  The picture is not a pretty one, but it is all too common.

Now, if the family had only taken the time to do some careful planning, many of these problems could have been avoided. Here are several important steps to a well-considered succession plan:

1. Create a shareholders’ agreement. This agreement is just as important as having a will. It governs various aspects of the control and management of a company and the rights and obligations of the shareholders. For example, when Dad and Uncle inherited the company, they could have executed an agreement with deadlock provisions to resolve fundamental disagreements, particularly since they were equal owners.

2. Put together a buy-sell agreement. This agreement sets out the terms of a purchase or sale of a company’s stock, which may be triggered by specific events, including the death, disability or retirement of one of the shareholders. The agreement will either specify the stock’s repurchase price or establish a method for determining such a price. For example, if there was a buy-sell agreement funded with life insurance on Dad’s life, Uncle could have used the insurance proceeds to purchase Dad’s interest in the company and provided cash flow for Mom.

One wrinkle: Dad’s will provided for his entire interest in the company to pass to Mom. If Dad and Uncle had executed a buy-sell agreement, it may have prevented any transfers to Mom or could have permitted transfers to a trust designed to benefit Mom as the surviving spouse and still qualify for the estate tax marital deduction.

3. Provide an employment agreement for key personnel or family members. The issues relating to the employment of CPA Son, including his firing by Uncle, could have been avoided if Dad had provided his son with a written employment agreement.  As for the employment of his daughter, those problems could have been avoided via a shareholders agreement and/or by-laws to specify who was authorized to hire and fire employees.

The upshot? If family business owners—as busy as they are—devote some time to succession planning, they can reduce stress, ensure the continuity of their business and the welfare of their families.

Patricia Galteri is Chair of the Wills, Trusts and Estates Practice Group at Meyer, Suozzi, English & Klein, P.C.  located  in  Garden City, NY.  Her practice includes the development of estate and family business plans to ensure the tax efficient transfer of wealth to the next generation while meeting the specific personal goals of her clients.  Contact:

Jayson J.R. Choi is an Associate in the Wills, Trusts and Estates Practice Group at Meyer, Suozzi, English & Klein, P.C. located in Garden City, N.Y. He  represents clients in Surrogate’s Court proceedings and in the administration of estates and trusts.  He also prepares wills, trusts, advance directives and estate and gift tax returns.  Contact:

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