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As the owner of a family business, what happens to it upon your death is entirely up to you—that is if you put a plan in place now. Otherwise, your business could fall into the wrong hands, or the legacy you planned for your children and grandchildren could be squandered in legal battles. Milton and Alpharetta business succession planning attorney John Boscoe recommends protecting what you have built with proactive planning.
Potential Outcomes for a Family Business When the Owner Dies Without a Plan
When the owner of a family business dies or becomes incapacitated without a succession plan in place, it can lead to a range of challenges and potential outcomes. The exact consequences will depend on various factors such as the size and nature of the business, family dynamics, and applicable laws, but the following is a general overview of potential outcomes.
Family Legal Disputes
Without a clear plan, family members may disagree about who should take over the business, leading to conflicts and disputes. Family members or other stakeholders may resort to legal action to determine the business's ownership and control, leading to costly and protracted legal battles. If there are multiple heirs, the business assets may need to be divided among them, potentially leading to the breakup of the business. The lack of a succession plan can also complicate the owner's estate plan, leading to unintended consequences and further disputes among beneficiaries.
Business Closure
In some cases, the family may decide to close the business altogether if there is no one willing or able to take over, or they may be forced to sell the business quickly, potentially at a lower price, to cover estate taxes or debts. Creditors may seek to collect outstanding debts from the business, potentially putting further financial strain on the family.
Loss of Value
Without a clear succession plan, the business may struggle financially due to mismanagement or lack of direction. Employees may become anxious about their job security and the future of the company, which can lead to decreased morale and productivity. The uncertainty surrounding the business's future may cause customers and suppliers to seek more stable alternatives, leading to a loss of key relationships.
The absence of a succession plan can lead to missed opportunities for growth, innovation, and strategic development. The business's value can decrease if there is uncertainty about its future, making it less attractive to potential buyers or investors.
Unplanned Change in Direction
Without a designated successor, someone unprepared or unqualified may take charge, potentially harming the business. Key employees may leave the company if they perceive a lack of stability or career growth opportunities. Without a clear path to follow, whoever takes over the business might not remain true to the owner’s vision and intent.
How to Avoid These Unwanted Consequences
To avoid these potential consequences, it is essential for family business owners to create a well-thought-out succession plan that addresses leadership, ownership, and the business's future in the event of their death or incapacity. Consulting with attorney John Boscoe can help ensure a smooth transition and the preservation of the business's value.
The specific plan you design for your business with John will depend on various factors, including the nature of the business and your goals for the future. A few options for a succession plan for a small family business include the following.
Family Member Succession
While you may have a family member who has shown interest, capability, and commitment to run the business, unless you officially designate that person to take over your leadership role upon your death or incapacitation, there could be problems. If the business is to stay in the family, you will need to discuss your plan with everyone involved and execute legal documents to make it happen.
Management Buyout
If you do not have a family member who is willing or able to run the business, you might allow key employees or managers to purchase the business over time. This can be structured with seller financing or other financing arrangements. If this is your plan, you would be smart to invest in training and development programs while you are alive to prepare existing employees for leadership roles within the company.
Sell to a Competitor
For some family businesses, the best course of action is to sell out and leave the proceeds to heirs. To plan for this, you might want to identify and negotiate with a competitor or another business in the same industry to buy the company and its assets under the conditions you lay out, which might include your unexpected death or incapacity.
When you meet with John to discuss your business succession plan, he will ensure that the chosen option aligns with your objectives and complies with applicable laws and regulations. He will also help you document the plan and communicate it clearly to all relevant stakeholders.