For many individuals who have conceived of, created, and built a family business, the dream of passing that business on to another generation can be a powerful goal as the years pass. Unfortunately, the success rate for handing down the family business isn’t very high. Only about 30% of family businesses successfully pass into the hands of the children of business founders, and only 15% or so make it into the hands of grandchildren*. One of the major reasons so few family businesses make the transition: the lack of a realistic succession plan. So, if you run your own business and want to see it stay in your family’s hands, you should consider a number of factors when you develop your succession plan.
First of all, what are your personal goals? Do you plan to retire completely at some point, or continue to work as long as possible? Do you want to phase out of the daily work routine gradually, or stop working all at once? At what age do you want to retire? And who do you want to take over if you should become disabled or die prematurely? How do you plan to remove the value of your ownership interest from the business? You need to come up with some specific answers to these questions as you create your succession plan.
What about your family members? Which of them wants to take over the reins someday? You may want to “divide” the operation up equally among your children, but that may not be possible — or practical. You have to consider family members’ ages, education, levels of experience, personalities, and other qualifications when making your plans. Where does everyone fit in? What if close family members are not really suited to continue the business? You may have to look beyond children, or grandchildren, to cousins, nieces, or nephews, for instance.
And what about your current employees? What might happen if a relative takes over as your successor and then has little regard for devoted, long-term employees who have helped you build the business? The operation could suffer real damage as a result. Thus, founders will often make provisions for veteran employees. You might want to specify that certain employees will be able to keep their jobs for a period of time, for example.
You should also spend some time thinking about the potential effects of estate taxes on the business succession. Sadly, it often happens that a business will fail to survive because it has to be sold in order to pay off estate taxes when the owner dies. Many business owners have found that life insurance is often the best source of funds for estate taxes and other liquidity needs, such as a buyout of your interest in the business at death. The availability of insurance proceeds can mean that the death of the business owner will not result in a forced sale of the business — or a major financial burden that could ultimately cripple the operation and lead to its failure.
If you would like to learn more about what you can do to keep a family-owned business in the family, give us a call. We stand ready to help.
*Aghdami, Farhad, "Buy-Sell Agreements and Nontax Issues in Planning for Business Succession" (2002).William & Mary Annual Tax Conference.
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