What Do I need to Know About Inheritance of the Family Business?
5 min read

What Do I need to Know About Inheritance of the Family Business?

What are tips for the inheritance of a family business? What is a succession plan? In this article, we'll provide some tips and things to consider when planning to hand down your family business! Keep reading to learn more!

Share this article:

In 1994, a Turkish man named Hamdi Ulukaya immigrated to the United States to study. Ulukaya was from a family of Kurdish dairy farmers. He never dreamed he would eventually start one of the biggest yogurt brands in the world. But America is the land of opportunity! Eleven years after Ulukaya arrived in America, he purchased a Kraft factory that had recently gone out of business. He rehired the Kraft workers and made a bet that Americans would learn to love Greek yogurt. His work paid off:  Ulukaya started Chobani. The yogurt company is now America’s top-selling Greek yogurt, valued at $1.5 billion.

As Ulukaya demonstrates, starting a successful family business is a big part of the American dream. We all love stories where somebody pulls themselves up by their bootstraps. They scrimp and save and hustle and eventually, they have a business that they can pass down to their children and grandchildren. But the “passing down” part is where things get complicated, as the hit HBO series Succession demonstrates. In the TV show, Logan Roy is a Scottish immigrant who has to decide which of his children inherits his media and theme park empire. But his children have different interests and capabilities and none of them seem prepared to be CEO. 

People who own small businesses, from diners to auto mechanics, face many of the same problems as billionaires like Logan Roy. What happens when the founder is ready to retire, becomes incapacitated, or passes away? Does the business pass down to the founder’s children? Should the founder sell the business? Are his or her children capable of running the business? Can he or she avoid paying their hard-earned profits to the taxman when they die? Here are some things to consider when planning on how to hand down your family business.

Children May Not Work Out as CEOs

Most private companies are family firms. Two-thirds of these companies plan to keep the company in the family, while only around 30 percent of them opt to sell. Leaving a company to one’s children sounds good but in practice, it is often not the best thing for the business or the family. Some children may have a sense of entitlement, while others may resent the expectation that they devote their lives to the family business. Children may fight with each other over who gets control, and the problems are exacerbated when the founder names one child as a successor. These family dynamics are even more explosive if there are multiple marriages and children. That makes leaving the business to the family more complicated.

The hardest decision founders face is who to make their successor. If leaving a business to a child, you need to determine if they have the right education and business acumen to handle the job. Communicate your expectations, especially if you expect the child to work with other family members. You’ll also need to establish that the child really wants to spend their life working in the business. If the child doesn’t seem like the right fit, you can look toward passing the business to a key employee.

Choosing the Right Mechanism for Transferring Ownership is Crucial

When planning for succession, you’ll have to decide how to transfer ownership of the business. There are three options:  a buy-sell agreement, a trust, or a simple transfer of ownership in your will. 

A buy-sell agreement is a legally binding contract between the owner of a business and one or more potential buyers. This agreement outlines the conditions under which the buyer can purchase the business. The contract could be triggered upon the owner's death, disability, or retirement. You can also stipulate the sale price and even payment terms for the sale. A buy-sell agreement can be a good option for businesses with multiple owners or partners who want to ensure a smooth transition of ownership.

A trust is a legal arrangement in which a trustee holds and manages assets on behalf of beneficiaries. The owner of a family business can create a trust to hold the business assets and designate a successor trustee to manage the business after their death. Logan Roy chose this option on Succession and the children fought over proposed changes to the trust. But that family drama isn’t a given. You can set up a trust that dictates how the business should be managed and distributed to beneficiaries. A trust can provide tax benefits and help avoid probate court.

The most straightforward option for transferring ownership of a family business is to transfer ownership in your will. In the will, you can say that your business should be transferred to your chosen heirs upon your death. Although this is the simplest option, it also comes with serious drawbacks, because your business will then be subject to the probate process. 

Tips for a Smooth Transition

You can use FastWill to manage this transition. Here are our other top tips to ensure that your legacy is protected:

Determine the value of the business  

What’s the fair market value of your business? Often it helps to bring in a professional appraiser to help you determine how much the business is worth and how much each heir should receive.

Consider the tax implications

Inheritance taxes can be significant, so it is important to consider the tax implications of passing on the business to your heirs. Consult with a tax professional to determine the best way to minimize taxes.

Draft a comprehensive will

Make sure your will includes specific provisions regarding the transfer of ownership of your business, as well as instructions for how it should be managed after your death.

Update your will regularly

Your business and family circumstances may change and when they do, you need to make time to review and update your will regularly to ensure that it still reflects your wishes.

Talk to your family about  your succession plan

It is important to communicate your plan with your family members and key employees to make sure they understand your expectations. It might be hard to have these conversations, but communication will help everyone avoid misunderstandings and disputes after your death.

Scroll Down
Share this article:
Let’s begin! First, what’s your name?

Your name that’s stated on your driver’s license, birth certificate, or passport.