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What if a Family Member Unexpectedly Exits the Business?

October 3, 2012
Leavens Family
  

By Chris Zoller, OSU Extension Educator, ANR, Tuscarawas Country


Family businesses are complex, challenging, rewarding, and often gratifying. Parents often desire their children to continue the business. However, like some marriages, they don’t always work. Finances, poor communications, personal goals, leadership styles, management philosophy, and life changes are but a few of the reasons these separations occur.

So, if you are faced with a situation such as this, what should you do? In no particular order, below are a few items to consider in an attempt to minimize damage to the business and family structure.

Legal Counsel – there is a great likelihood that legal advice will be needed in the process of dissolving the present business relationship and organizing a new structure. It is recommended that the same attorney not represent all parties in a situation such as this. It makes it difficult for the attorney to fairly representing each client. An alternative to this is to enter into mediation, if all parties agree to do so.

Financial Advice – hopefully, good financial records have been kept and accurately reflect the financial health of the business. Good records allow for a thorough analysis of the business and can assist in evaluating potential alternatives. How will the member who is exiting be compensated for his or her share of the business? How quickly does this member want to receive payment? Will land or other assets have to be sold? If so, what impact does this have on the financial performance of the business? This may be a good opportunity to complete a financial analysis with your Extension Educator or lender using FINPACK.

Counseling – this will be a stressful and emotional time for everyone. There will be times when you don’t know where you are headed. Don’t be afraid to seek professional medical counseling. Depression and anxiety are not uncommon when going through a situation such as this and your doctor may be able to prescribe medications to assist you during this period of time.

Talk to Someone You Can Trust – talking to others privately about your situation can be helpful. Examples include clergy, a close friend, spouse, or Extension Educator. These folks can help provide positive reinforcement and offer advice based on their personal experiences.

Update Documents – consider things like insurance coverage, Wills, documents related to your business structure, etc. Often times, after the business relationship is dissolved, these and other related items will need to be changed to reflect the new management structure.

Set Goals – evaluate where you want to be and where you want the business to be in the short and long-term. What will you have to do to accomplish these goals? Involve and seek input from all remaining family members as you compare and set personal and business goals. Remember, goals should be: Specific, Measurable, Attainable, Rewarding/Realistic, and Timed (SMART).

Maintain Relationships – it will be difficult, but every attempt should be made to maintain healthy family relationships. There will be times when members may not or will not talk to one another and there will be hard feelings. Do what you can to dissolve the business relationship while still maintaining the family.

Timing the Exit – before dissolving the business relationship, consideration may want to be given to its timing. There may be tax or other implications as to when the business relationship ends. Consult an attorney and/or tax advisor for advice.

Dissolving a business relationship, much like a divorce, is not a fun experience, but unfortunately this may be the only alternative available. If this is the case, do your best to maintain a positive attitude, seek professional assistance, and map out a plan for the business to continue well into the future.

 

For More Information
Read more about succession planning with Farm Journal's Legacy Project.


 

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