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Succession Planning for Family Owned Businesses

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Steve Clausen, a founding member and head of the Estate Planning and Probate Section of Clausen & Centrich, PLLC, published the following article in PKWY Magazine in the October 2016 issue:

 

SUCCESSION PLANNING FOR FAMILY OWNED BUSINESSES 

            An inevitable issue facing every family business is succession – who will replace the current owners and officers once they retire or die?  The family business owner has four basic choices to dispose of such business: (1) sell, (2) lifetime gifts, (3) transfer at death, or (4) liquidate.  Proper succession planning allows the business owner to determine which option works best for him, his family and his business.

What is a Family Business?

            A family business includes (a) two or more unrelated people who have formed a closely held business, (b) a husband and wife, (c) a parent and child or children, (d) siblings who are in business together, or (e) some other combination of the foregoing.

What Is Succession Planning?

            Succession planning involves planning for the preservation and transfer of control of an individual’s business in a manner that carries out his or her objectives. 

Probability of Succession Failure

            Statistics in one study show that only 30% of family businesses survive for more than one generation (i.e., from parent to child), only 15% of family businesses last for two generations (i.e., from grandparent to grandchild), and only 1% of family businesses survive for three or more generations.

Why Do So Many Family Businesses Fail in the Second and Third Generations?

            The leading causes for why so many family businesses fail are: Unresolved family discord such as bad management, and lack of training; lack of, or inadequate, business succession and personal planning; high taxes (death and income taxes); and unforeseen problems.

The problems associated with high taxes, bad management, and family discord can be controlled, and even eliminated, by a thorough succession plan.

Dealing with Emotions

            The owner may have a major reason to not address succession planning – the desire to avoid making two difficult decisions: “When is it time to leave the business?” and “Who should take my place?”  Succession issues also have the potential to wreak havoc, both in the business and in the family.

Four Important Facts the Family Business Owner Should Consider in Succession Planning

Succession planning is important for every family business. Failure to develop a formal succession plan will impair the family’s finances and personal relationships. Without carefully coordinated succession and personal planning much of the family’s wealth may go to pay taxes. Often times, impartial, outside advisors are necessary to help the business owner effectively solve the succession problems.

Key Questions

            To implement a business succession plan, the owner needs to resolve four distinct questions: Should the business be sold or kept under family control? If the business is to be sold, who are the potential buyers and when should it be sold? If the business is kept in the family, who should have ownership and ultimate control? If the business is kept in the family, who should be in charge of day-to-day operations?

Formula for Successful Succession Planning

What can a business owner do to successfully transfer business? Develop a clear retirement career plan for the business owner and the owner’s spouse.  Develop a realistic and shared written vision for the future of the business to guide the business when the business owner is no longer actively involved and in charge.  Select and train the successor.  Develop a process for transferring authority and power in the business.  Develop a wealth transfer plan that specifies how family assets and ownership of the business will be protected and distributed.  Design the business succession plan including management structures, family council, and board of directors.  Design a family participation plan that specifies understandings and rules for future family involvement in the business. 

Summary

            Remember that succession planning is a process, not an event, and it is more than simple estate or retirement planning – it’s part of a comprehensive wealth transfer plan.  It is the blueprint that guides the owner and family in successfully dealing with perpetuating the family business.

 

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