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Transitions in Family Business

With the economy rebounding, property and business valuations increasing, some closely held business owners finally have an eye toward moving on. It may be the right time to sell outright, to exercise a buyout provision of a Shareholder agreement, or establish a succession plan. With family owned businesses, this may present unique challenges. As many attorneys can attest, a family owned business is often an extension of the pre-existing familial relationships, which means that disputes may arise where family values and expectations conflict with business values. Conflicts within the family may spill over into the business, and vice versa. For example, divorce of one of the owners and its implications that are not contemplated at the time the business was formed may disrupt business operations; aging patriarchs may not want to let go of the business; parents may treat children equally in distributions, despite their contribution to the business. Each of these scenarios can wreak havoc. When members of a family are doing business with one another they are often relying on each other’s trust. But when the trust has broken down, that is when the conflict occurs. There are some measures that may be taken to prevent discord, or at least guide the parties to a solution:

1. Operating Agreement. Lack of communication among family members, or setting expectations in advance can mitigate one controlling family member’s power over another. Issues like when capital contributions are required; how business decisions should be made; how earnings and losses will be distributed; what opportunities belong in the business can all be addressed in Operating Agreement. Many closely held family businesses forego this agreement with the mistaken belief that such formality is unnecessary, however, having this in place can address the problems head on.

2. Shareholder Agreements. These agreements can help insure the business assets stay within the family in the event of a divorce, dictate how the assets are assigned in the event of death or disability, and provide a mechanism of buy out in the event of a deadlock in decision making.

3. Marital Agreements. Business attorneys often seek the counsel of family law attorneys to draft a marital agreement. Marital agreements can define whether ownership of the business is marital property or remains separate. This would be key in the event of divorce. This can also be key in situations where spouses are married, and co-owners. There are countless stories of businesses folding or fire-sale when the owners break up.

4. Trust Instruments. A comprehensive estate plan, with various trust instruments can also help define and retain business ownership in the family and or give a stake to children. Setting these expectations in the estate plan can prevent infighting later.

5. Succession Plan and Management Agreement. These plans can help identify internal people to develop and fill key roles to ensure the business continues and has effective leadership when the founder or other key person retires, passes, or is no longer capable of continuing on in the organization. Not only do these agreements create a sense of stability and organization, they can be effective in reducing discord at critical times.

The attorneys of Dalton & Tomich, PLC have a breath of knowledge in the operations of family-owned and closely held businesses, and can assist in these transitions whether they are selling or seeking to provide a plan for the future.

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