Legal Corner

Financial and legal aspects of succession
planning for family-owned businesses

By Stephanie M. Smith,
Senior Legal Advisor
USDA Rural Development
Cooperative Programs

s discussed in a prior Legal Corner article about business succession planning (“succession planning,” hereafter), succession planning is key to protecting your company, your family and your employees against monetary burden that could leave your business in financial and legal ruins. For example, if you plan to turn over your business to your children, you have to think about the heavy gift taxes they will face. If you die, your heirs can suffer an equally prohibitive estate tax.

This is a huge issue for many rural communities, and it can have related impacts on members of farmer cooperatives. In addition to their farms, many co-op members also have related businesses (such as custom harvesting or crop application services, etc.) that may operate as family businesses.

If you want to sell your business to employees, either an employee stock option program or a worker cooperative can be organized. (see the January- February 2009 issue of Rural Cooperatives for more on this topic). Lastly, you may decide to sell your firm to a chain or a local competitor. So, where does a business owner start?

Critical issues to consider
Legal framework
Once the financial issues as discussed above are taken into consideration, it must be determined how you will transfer your farm or other family business to the next generation. The structure of your company will be a factor in determining your choice of the transfer method.

Get help, take action!
Keep in mind that many issues arise when a family-owned business embarks upon its possible succession. These include: Before making a final decision, consult legal and financial advisors who are aware of the complexity and sensitivity in business succession planning. They should be able to work as a team with your estate planner to determine the estate tax and other transfer costs, need for liquidity, buysell funding requirements, FLP parameters and the likelihood of sale of the business to outside parties.

However, the skills of your advisors or the importance to your family of business succession planning are meaningless unless you take action. The most important aspect of business succession planning is for the owners to become convinced that they need to take positive steps to avoid having their family business disappear due to a lack of planning. Do not let that happen to your family business — design a succession plan that will successfully move your business from one generation to the next!

November/December Table of Contents