Our region is one of the most entrepreneurial in the world. Even people who work full-time at a “regular” job often tinker in their garages, basements and back yards. People enjoy having their own businesses, whether it is a farm, a manufacturing business or a home-based service or sales business such as Nerium, Avon or Isagenix.
A similarly unique aspect of our region is our family focus. There is a strong desire to take care of our offspring, not just with money but also with wisdom, experience and opportunity.
Therefore, there are many parents who want to pass their businesses to their kids and grandkids.
Often, the most challenging aspect of passing on family businesses is that businesses can be the largest assets that families own. If the family includes people who will not be involved in the family business, parents can find it difficult to treat those non-business family members fairly, if not equally.
Often, certain family members inherit the business (at-business family members) and others (non-business family members) receive only a little money, compared to the value of the business if sold as a whole. This potential money differential may not be a big deal if the business is never sold. However, if the business is sold by the at-business family members, the resulting cash disparity can severely disrupt family harmony.
Conversely, if at-business family members have to pay “full retail price” to their siblings for the business, the business may not remain financially viable.
There are several tools that can be used to create fairness in family business succession planning. First, life insurance that is purchased long before succession can help equal out the financial disparity between at-business family members and non-business family members.
Second, a structure that allows the at-business family members to buy out the non-business family members over the course of several years can help ease the financial burden on the business while equaling out financial disparity between at-business and non-business family members.
Third, properly valuing the business as fractions of an operation as a whole can help make the buyout for at-business family members more reasonable. In other words, if one person owns one-fifth of a $100,000 business, the value of that person’s ownership may not be worth $20,000. In fact, that one-fifth share of a $100,000 business may be worth only $10,000 or $15,000. This discounted value represents the lack of marketability and lack of control inherent in owning a minority interest in a larger enterprise.
Fourth, prohibitions or limitations on business sale or liquidation can help. For example, if an at-business family member sells his or her interest within a certain time after acquisition of the business, that person may be required to pay extra to the non-business family members.
Family business succession planning is best facilitated by legal and accounting professionals who know the ins and outs of the tools above and a myriad of other resources that can help keep family businesses viable for generations while treating non-business family members fairly.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-523-5523. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.