Tools available for family business transitions

Tools available for family business transitions

Transitioning your family business to your heirs may sound simple enough, but in fact, doing it successfully can prove difficult. To help improve your transition’s chances for success, consider family business governance.

This is a system of correlated tools and actions to support the next generation with controlling, owning, and operating the business. It also puts in place a framework that contains business protocols, describes how future ownership changes occur, and establishes a precedent for making business decisions.

Frequently used tools

There are several tools that can be employed as part of a family business governance system, including:

A buy-sell agreement is a legally binding contract that stipulates how an owner’s share of a business may be reassigned if triggering events occur, the price that will be paid, and the payment structure.

A family employment policy document can be kept within the family for private use or incorporated into the business’s human resource documentation. It sets expectations for heirs, spouses, and extended family members about such issues as how they can obtain employment in the business, the requirements to attain key positions, the compensation standards to be used, and incentive language for family members.

A distribution or dividend policy is key in setting expectations with family members regarding what distributions they should expect to receive from the business. Business owners must balance the need for cash to maintain or grow the business with the desire to receive distributions.

A professional board of directors is a governing body that helps oversee the business and makes major decisions. A board generally comprises three, five, or seven professionals from various industries that have the subject matter expertise to assist the company strategically.

A family board or council is a group within the family — or may include the entire family — that comes together to make decisions about the business on the family’s behalf.

A company mission statement can be valuable to your employees and your family as it addresses the business’s purpose and vision and can help guide future company leaders.

Your estate plan can address ownership, control, distributions, and several other factors.

The business’s governing documents should be reviewed at the same time the family business governance system and tools are put in place. Revisions to these documents or corporate resolutions stored in the corporate minutes may be needed to align these documents with the company’s governance system.

Helping ensure a successful transition

Transitioning the family business to the next generation is much more than transitioning shares. A well-thought-out and documented plan that addresses ownership, control, and operations helps build a strong governance system for your business. This system, combined with communication with the next generation, can be key to helping ensure your transition’s success.

Wells Fargo Advisors is not engaged in rendering legal or tax advice. If legal or tax assistance is required, the services of a competent professional should be sought.

This article was written by/for Wells Fargo Advisors and provided courtesy of Brian Konish, Managing Director-Investments in Boston at 617-289-9418.