Our region’s family businesses sponsor our kids’ athletic events, donate to our religious functions and typically bend over backwards to accommodate our unique situations and requests. Therefore, the value of family businesses remaining in business as family businesses is valuable to those families and our entire community.
To keep those family farms and businesses in the family, especially if and when an owner gets sick or passes away, those family businesses need a plan, usually called a succession plan. The reality is that farms and businesses do not just magically pass from one generation to the next without planning and action. The failure to plan can often result in the business’s failure upon a key person’s illness or passing, because that event may coincide with a downturn in the business’s profit cycle or a time when financing for a business purchase is difficult or impossible to obtain.
The plan needs to consider four main components: money, people, estate plans and contingencies.
First, a family business by its nature has value that has taken one or more lifetimes to acquire. Frequently, many family members have contributed to the family farm or business with “sweat equity” (including extra responsibility, inconvenient hours, etc.) over years or decades, and there can be a desire for business succession plans to accommodate that.
Often, though, the money that it takes to start a farm or business without help from someone already in the business can be insurmountable. Therefore, succession plans very often include some “seller financing” in the form of either a discount in the purchase price, stretched out purchase payments over several years or both. Ultimately, the goal is to ensure that the business can cash flow.
Second, people are a key part of the plan because there is usually at least one family member who is not a part of the business. The plan needs to accommodate those non-involved people, whether they are remote siblings or in-laws. Sometimes, simple communication can handle the “people” involvement component of the plan. Other times, interviews and feedback from many frontline members of the family can help ensure that there are no surprises or hard feelings later.
Third, the estate plans (what happens to assets after death) for all people involved in the family business need to be prepared contemporaneous with or shortly after the business planning.
For example, parents may sell a business to their daughter at a discount through payments made over time. The parents may then be giving those annual payments to the daughter’s siblings. If the parents’ estate plan does not specify otherwise, if the parents die before the daughter is done making payments, the daughter may be getting back some of the money that was intended to go to her siblings.
Finally, like every plan, there needs to be room for contingencies. The plan needs to be flexible enough to recognize and accommodate later changes without having to start over every time there is a surprise, because some day, it will be too late to re-write the plan.
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 419-659-2058. 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.