Passing down a family business

Special to The Times

Dear Karen: I have a successful small business and would like to pass it down to my children someday. What can I do now to prepare?

Answer: The decision to pass down a family business involves many issues, including family psychology, sustaining profitability and market share and transferring the business in a way that will minimize gift and estate taxes. Involve your children in the company while they’re young and then let them make the decision about whether they want to eventually take over.

Brent Lipschultz, a principal at national audit and accounting firm Eisner, advises clients to set up family limited partnerships that include their children, or name them nonvoting shareholders in the firm. These are ways to get them interested in the company and give them a sense of ownership early on. “When it comes time for them to become sole owners, they are more comfortable because they have been familiar with and vested in the company for a long time,” he said.

It is also never too early for you to draft a succession plan that includes provisions for your children’s future employment in the business, control of the business and ultimate ownership of the business.


As they get into their teen years, establish a mentoring plan for any children who think they may want to take over the company, and make your expectations clear. “The parameters can be set through such vehicles as incentive trusts, which would allow for transferability of business interests provided certain objective criteria are met. For example, you can establish incentives for your heirs to go to college or get an MBA before allowing them to take over the business,” Lipschultz said.

Such incentives will help ensure that your next generation will have the necessary skills to easily transition into ownership of the business you’ve worked so hard to make successful.


How to safeguard a trade secret


Dear Karen: What is a trade secret and how do I go about protecting it?

Answer: A trade secret is something valuable and unique that helps your business succeed against the competition. It could be almost anything, including a recipe, a formula, a manufacturing process or a customer list.

California’s Uniform Trade Secrets Act, civil code section 3426, contains a provision to enjoin and award money damages for violating or misappropriating a trade secret. The website of the California State Bar,, has an overview of the law (search “trade secrets”).

Some trade secrets are so unusual that they will always set your firm apart, said Larry Apolzon, an intellectual property attorney and co-author of “From Edison to iPod: Protect Your Ideas and Make Money.” Other things you consider trade secrets may be easily reverse engineered, or they may be logical innovations that your competitors will figure out on their own.

Even so, it’s a good idea to catalog anything you consider a trade secret and keep it in a secure place.

“You should have specific rules in place with your employees about who has access to trade secrets, and you should keep them absolutely confidential, disclosing them only on a need-to-know basis,” Apolzon said.

Those people who must know your trade secrets should sign confidentiality and nondisclosure agreements acknowledging their receipt of the information and promising not to misappropriate the secrets in the future. “If you get into a legal dispute, you’ll have to show the courts how you protected your trade secrets by establishing security policies around them,” he said.



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