Do Family-Owned Businesses Need a Change of Control Agreement?

An important part of business planning is considering what happens to the business upon your death, or when you need to retire.  Will the business continue, will it stay in the family and, if so, who will succeed you in managing the business?  There are business planning documents that can be used to establish and maintain continuity of a business, but which type of document is required?  Clients often ask whether they need a “change of control” agreement or a “buy-sell” agreement.  Your estate planning attorney can help you make this decision.

What is a change of control agreement?

We are often asked whether family-owned businesses need change of control agreements.  A change of control agreement, sometimes called a “golden parachute,” is most often used to compensate executives who lose their jobs after the merger or sale of a company.  A change of control agreement is essentially a type of severance agreement, but it has a very specific purpose in the corporate setting.

What is a severance agreement?

Generally speaking, severance agreements are contracts between employer and employee which spell out the rights and duties of each party, should the employment relationship be terminated.  The primary aspect of a severance agreement is the provision for pay and benefits given to the employee, under certain specified conditions.

The purpose of severance agreements

A main benefit of severance agreements is encouraging recruitment and retention of critical employees.  The promise of a severance package can influence executives to leave one employment opportunity for another, while providing mitigation of risk, should the new position not work out.  Meanwhile, the employer includes a non-compete agreement for its own protection.

Change of control agreements are used more for larger companies

Because employees in executive positions are considered fiduciaries, they are required to make decisions with the best interest of the company in mind.  But, when executives are faced with considering a merger or sale of the business, they are also faced with the serious possibility of losing their position.  This is where a change of control agreement can be beneficial.  Such an agreement will encourage executives to seriously consider merger and sales opportunities, without being concerned about losing their jobs.  As such, change of control agreements are typically not as necessary in the context of family-owned businesses.

A buy-sell agreement can be a better alternative

A buy-sell agreement can be used to place limitations on the sale or transfer of interest in a family-owned business.  Based on the terms of your agreement, you can give your children authority to sell or transfer their interest in the business only to specific individuals named in the agreement.  This way, you can be sure that the family business stays in the family.

When to use a buy-sell agreement

A buy-sell agreement is most helpful when a business, or business property, is owned by two or more people.  It is also beneficial when you intend to leave the property to more than one member of your family.  Having a buy-sell agreement in place can go a long way toward preventing a family feud regarding inheritance rights.

If you have questions regarding succession planning, or any other business planning needs, please contact Wilcox Attorneys, PA online or by calling us at (479) 443-0062.