The Ties that Bind: Transferring a Family Business to the Next Generation
If you are the founder of a business that employs your family, there will come a time when you (or your younger family members) believe it is time to hand over control to the next generation of the family. Effecting that transfer without straining the bonds of familial affection is tricky, because making change opens up discussions about every aspect of the business and often also brings into play family dynamics and history as well. If you are considering (or being asked by your family to consider) transferring controlling interest in a family business, you will be well served to work with an attorney and a financial advisor to develop transfer agreements and other documents designed to avoid (or at least minimize) the discord associated with change.
After selecting your advisors, the first question you need to ask yourself is whether you think transferring the control of the business to your family members, versus selling to third parties, is best for your business. Items to consider are each family member’s current role in the enterprise, their financial responsibility, their ability to lead, and whether owning your business is their dream. If you determine the next generation of your family is the best choice to take over your business, here are some suggestions:
- Make sure all family members (including those not working in the business) know and understand the terms of the proposed change in control to the younger generation
- Explicitly define what your role (as the senior member) in the business will be post transfer
- Determine how family members who will not be operating the company after the change in control will be treated. Will such members receive any compensation in lieu of an ownership interest in the business, will the business compensate them as passive shareholders, or will some other arrangement be made?
- As the senior member transferring control, will you be compensated for your interest in the business, and how?
- Identify all items of personal and real property titled in the name of the business or used regularly by the business and determine how each property item will be treated in the transfer
- If there are any loans secured by property, or guaranteed by you as business owner, determine if consent to the transfer by the lender is required
- If you are a franchisee, determine if the franchisor is required to consent to the transfer
- Determine whether there are any benefits (insurance, cell phone, company car) you expect to retain post transfer
- Determine if the transfer will happen all at once, or gradually over time
- Determine how and when customers will be informed of the change in control
- Determine if there are transferrable licenses, or licenses the next generation must obtain to legally operate the business
- Discuss what happens if the business fails
- Determine optimum tax treatment for the transfer and structure the transfer accordingly
While that list may seem long, it is only the beginning. Working with experienced attorneys and advisors can help to streamline the process and help you pass on your legacy to the next generation.
Leigh Kellett Fletcher has been practicing land use, environmental and real estate law since 1997 and regularly represents clients acquiring, developing and selling real estate in Florida and the U. S. Virgin Islands. She has been involved in the purchase, sale and redevelopment of multi-family residential projects, office, commercial and mixed use properties and has worked with clients to obtain land use entitlements and environmental permits to develop and expand commercial development.