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Saving the Family Business

Business owners face a unique issue at death. Unlike publicly traded stocks where there is a ready market to purchase these assets, a business owner’s family usually do not have ready buyers on hand. Thus, coming up with a plan for continuation is critical.

The first step is to determine whether or not there is value in the business. There are two types of businesses. The most common is one where the owner does all the work - this is typically a job. There are many lucrative businesses that operate this way. Examples can be seen in small medical offices, solo law firms, or dental offices. Sometimes, these offices grow to the extent that they in fact operate like a business. In these later instances, the death or disability of owner will be felt but they will continue to operate. There are a variety of ways to provide the business continuation.

The first one is to have the business accept partners. Owners are sometimes reluctant to share control. This should not be an obstacle, because with the right planning, the principle owner can retain control by keeping a majority of the business interests. Furthermore, combinations of voting and non-voting shares can be used so that the principal owner remains in charge.

The obvious benefit is that there is someone in the company who can purchase the owner’s interests. A less obvious benefit is the company becomes more stable as junior partners are groomed and develop the skills necessary to operate the business.

The second option is to identify a buyer. For medical practices this could be an affiliated hospital. For dental practices, there are brokers that operate in this space buying and selling medical practices. One the owner dies, especially when the owner is the one with relationships with peers, there is often difficulty in identifying buyers. While brokers can be used in certain instances. In other instances, it helps if the owner leaves a list of potential buyers to contact. This is also better for the customers as the death of the business owner does not place them in limbo.

The third option is to wind down the business. Unfortunately, unless there was advanced planning, this process can be as difficult as the sale of the business. Advanced planning, once again, is the key. Will someone be interested in purchasing existing contracts, equipment, etc.? The owner is in a unique position to identify who this could be.

The final option, and one of the trickiest to plan for, is when giving the asset to a family member. Here, the business may represent more than an investment but a family legacy. Unfortunately, that can give rise to unhealthy attachments. Too often litigation arises when siblings use their majority control to prevent a minority shareholder sibling from getting a benefit of the family business. Conversely, minority shareholder siblings may seek to have a voice in decisions they are not qualified to give. These toxic relationships create a minefield for the business and its owners. Best to address these issues in advance. Establish well in advance what will be happening so that the children know what to expect..

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