Newland's Business Notes

Family Business Planning

Volume 7 Issue 4 -- July/August 2003

Recently, in the companion newsletter, Tax & Business Insights, there was a discussion about business succession in families and small groups.  Those newsletters prompted some useful input from a family business consultant named Rosamond Tompkins, here in Manassas . 

The following discussion about David D. Lay (hereafter “D. Lay”) incorporates some of the ideas that Ms. Tompkins had concerning family business planning.

Let’s suppose that D. Lay is typical of many business owners.  As D. Lay progressed in age, his own mortality and the idea of someone else running his business caused the inevitable delay in planning.  In addition to legalistic planning — thinking about  who owns the stock, whether there is a buy-sell agreement, and similar issues — there are also family considerations to take into account.

Family Planning

In July 1998, another edition of this newsletter addressed the issue, “Don=t Assume That Your Children Will Get Along.”  The emphasis there was on the explosions that can occur in families after the death of the founder of a business. 

Of course the founder, here D. Lay, can do much to mitigate those problems by doing business planning in conjunction with some “family planning.”

Let=s say for example that there are three sons and a daughter.  All three sons are active in the business and the daughter is living with her spouse in Arizona. 

How is this situation to be handled in a fair manner?  Should one son be given the majority of the stock and control of the board of directors?  Should the control among the three sons active in the business be equal? What role should the daughter play?

It seems that there are two broad general approaches:  (1) do nothing (delay); or (2) plan and implement.  The second choice, plan and implement, is infinitely harder than doing nothing. 

The older generation which chooses to do nothing, in effect, lets the harm visited by lethargy fall on those who have to pick up the pieces after the founder is gone or too sick to communicate or effectively operate. 

Assuming the husband dies first, which is statistically more likely, then even if the wife is inactive in the business, she still can play a vital and important role in keeping the children going in the direction that is in the common interest of the family members.

One of the things which is often overlooked is the premature death of a child who may be married.  If that child has no Will, then the spouse of the child may become an inadvertent, unknowledgeable, and sometimes uncooperative, owner of a share of the family business. 

While lawyers can, and often do, sort through the legalistic formulas for implementing what the founders want, such implementation cannot, and does not, insure that the family will accept or abide by such choices. 

Indeed, even the most clever plan and documentation from a legal or tax standpoint is worthless if it does not accurately reflect the family realities and the individuals involved.

When family unity becomes important, consultants such as Rosamond Tompkins can be of assistance.  While it is undisputed that a legal plan for business succession incorporated in Wills, Trusts, Buy-Sell Agreements and the like is the preferred course, utilizing the insights of a family business consultant is far better than doing no planning. 

An even better implementation is to bring the members of the family to the legal planning meetings and obtain their concurrence and acceptance of whatever has been incorporated in the formal documents.  A family business consultant can help clarify the planning from the family perspective. 

If you feel you need the legal-business planning, or the family-business planning, described in this newsletter, please contact Newland & Associates at (703) 330-0000.

Copyright 2003

Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.

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