How to Protect a Family Business

But the senior generation may be reluctant to relinquish the reins. That's because it entails accepting mortality, observes Dick Emens, executive director of the Conway Center for Family Business at Ohio Dominican University in Columbus. He advises owners to complete and communicate a written succession plan by their 50s.

A well-crafted plan also minimizes taxes and "provides for the retiring generation without hobbling the business' need to grow and take risk," says Ira Bryck, director of the UMass Amherst Family Business Center in Hadley, Mass. Yet, "the plan is not a static thing that gathers dust on a shelf," Bryck says. It can be amended because "owners have irreconcilable differences, or the business isn't sustainable, or the investment and risk needed are too great, or the people involved are bored."

Disagreements between family members can escalate to catastrophic highs. Take, for instance, the case of L.S. Schoen, who in 1945 founded what would become the world's largest consumer truck-rental corporation, U-Haul. Profits plunged and relationships soured amid feuds involving his 13 offspring, a daughter-in-law's murder, lawsuits and financial meltdowns. Two of Schoen's sons bickered with their brothers and removed him as chairman.

A buy-sell pact in a succession plan can help avoid some of these problems. When the succession results in a partnership — for example, between siblings or cousins — it should include a value appraisal and buy-sell agreement in case someone decides to exit, says Don Schwerzler, founder of the Atlanta-based Family Business Institute and the online resource Family Business Experts.

Emens suggests that voting power should go to family members who will lead the business in the next generation. Too often, when a proprietor divides stock equally among children, siblings who don't work in the business may sell their shares. Instead, Emens would give voting stock to some and nonvoting stock to others.

Other points to consider: Forming an advisory board creates a safety net in the event of illness, disability, death or tough economic times. Training a successor prepares a capable leader to take the helm, Schwerzler says. And hosting family retreats and business meetings keeps people in the loop.