“Studies have shown that the number of family businesses owned by second generations and third generations dramatically decline for a number of reasons. One large reason is the lack of business succession planning for the family business.”
The importance of the family business in the U.S. can’t be overstated. Neither can the problems that occur as a direct result of a failure to plan for succession. Business succession planning is the development of a plan for determining when an owner will retire, what position in the company they will hold when they retire, who the eventual owners of the company will be and under what rules the new owners will operate, instructs a recent article, “Succession planning for family businesses” from The Times Reporter. An estate planning attorney plays a pivotal role in creating the plan, as the sale of the business will be a major factor in the family’s wealth and legacy.
- Start by determining who will buy the business. Will it be a long-standing employee, partners, or family members?
- Next, develop an advisory team of internal employees, your estate planning attorney, CPA, financial advisor and insurance agent.
- Have a financial evaluation of the business prepared by a qualified and accredited valuation professional.
- Consider taxes (income, estate and gift taxes) and income requirements to sustain the owner’s current lifestyle, if the business is being sold outright.
- Review estate planning strategies to reduce income and estate tax liabilities.
- Examine the financial impact of the sale on the family member if a non-family member buys the business.
- Develop the structure of the sale.
- Create a timeline.
- Get started on all of the legal and financial documents.
- Meet with the family and/or the new owner on a regular basis to ensure a smooth transition.
Selling a business to the next generation or a new owner is an emotional decision which is at the heart of most business owners’ utter failure to create a plan. The sale forces them to confront the end of their role in the business which they likely consider their life’s work. It also requires making decisions that involve family members that may be painful to confront.
The alternative is far worse for all concerned. If there is no plan, chances are the business will not survive. Without leadership and a clear path to the future, the owner may witness the destruction of their life’s work and a squandered legacy.
Speak with your estate planning attorney and your accountant, who will have had experience helping business owners create and execute a succession plan. Talking about such a plan with family members can often create an emotional response. Working with experienced professionals will enable you to benefit from a lack of emotional connection to the business , thereby helping the process be less about feelings and more about business.
Reference: The Times Reporter (March 7, 2021) “Succession planning for family businesses”