Stein Sperling: Obstacles in Transferring Family Businesses

In my over 25 years of representing clients in disputes among business owners here at Stein Sperling, I have seen two common patterns. First, the majority of these disputes involve family members. Second, many of these disputes could have been avoided had there been a well-developed succession plan in place, including an updated shareholder/partnership/operating agreement (“Agreement”) that contained appropriate provisions addressing ownership and transition issues, as well as methods for amicable dispute resolution.

Unfortunately, in many of these cases I have represented parents who have worked hard to build a business and develop caring and supportive relationships with their children and other family members. The parents often want to pass along a successful business to be enjoyed by future generations. However, without an effective transition plan for the next generation to take over, they have planted the very seeds that may ultimately destroy the family relationships they worked hard to develop.

I have found that the biggest reason family business transition plans have not been created and implemented is because the parent-owner generation has difficulty addressing some common obstacles. Five obstacles I consistently observe are as follows:

The owners’ concern about the loss or sharing of control of the company they created; the owners’ general unwillingness to part with the asset and possibly reduce their personal cash flow; the owners’ concern about dealing with their own mortality and facing “closing the chapter” of their lives as a business owner; the owners having to make what might be an unpopular family decision with regard to the future ownership and management of the company; and the owners having to deal with the potential friction created between themselves and family members who become “vested” in the ownership of the business.

While it may seem daunting to address these five obstacles, with creative estate and business planning, and participation by family members, most of these challenges can be overcome with little difficulty. Once owners develop a plan, the next step is to address the practical and business concerns. Family business owners should consider these questions:

Does the business itself have long-term viability? What changes and growth would be necessary in order to ensure its future in the marketplace? Are the family members qualified, capable and willing to operate and manage the business into the foreseeable future? Are there positions in the company for other family members? What if any estate planning or other provisions need to be contemplated for those who will not be a part of the business in the future or for those who have special needs? What protections need to be incorporated into the transition plan to ensure that those family members in control of the business can effectively operate it while also protecting the interests of those not in control with fair and ample dispute resolution provisions?

Finally, once a transition plan is developed and business concerns are considered and addressed, it is essential that these concepts be incorporated into a well-developed Agreement. The Agreement should not only address the transition of the ownership to the next generation, but also spell out the governance and management, restrictions on transferability of ownership interests, employment, compensation of management, dispute resolution and other issues commonly addressed in shareholder/partnership/operating agreements.

In summary, a family business has a much greater chance of surviving and thriving, and the likelihood of future family harmony increases, when a plan for transferring ownership to the next generation is well developed, carefully implemented and revisited and revised as necessary.

Millard Bennett is one of the founding principals for Stein Sperling Bennett De Jong Driscoll PC, a law firm based in Rockville, Maryland. Millard’s practice is concentrated in the areas of business organization, business ownership conflicts, conflict resolution, transition of ownership interests and civil litigation. His background in business, as well as his experience in running a successful law firm, gives him particular insight into the legal and financial needs of the business clients he serves. Millard frequently speaks on business transitions, disputes and controversy topics to various business and civic groups throughout the Washington, D.C., area.