The Importance of Family Business Succession Planning

Do you have a plan if the family business must change hands because of illness or retirement? Why is it important to start considering a business succession plan for your business? A succession plan will establish an orderly transfer of the management and ownership of the business to new managers and owners to avoid liquidation of the business, as well considering tax treatment and other anticipated expenses and allows incorporation of the family’s nontax objectives.

A Succession Plan controls future ownership and management transfers to different groups or designated transferees.

What is considered a family business? It is an enterprise owned and controlled by one or more families who plan on succeeding generations continuing to own and manage the business. Generally, only about 30% of these businesses survive the second generation and 12% the third generation.

Family businesses generate about 50% of our gross national product. The strength of the family business is independence, accomplishment and income for the family.

Why is a family Business Succession Plan so important? Estate taxes may be significant and is an important issue to be addressed. The estate tax plan involves providing funds to pay estate taxes upon the death of the founder of the company. Other strategies may involve transactions that are subject to income tax such as intra-family sales not involving grantor trusts.

As the principal of the family business starts to age, tension can develop concerning when the older generation should retire and turn over ownership and management to the younger generation. Another big concern is the effect of estate taxes on the business. Personal issues concerning siblings’ emotions and roles in the business are usually in the mix.

Once the decision is made to establish a succession plan, find a knowledgeable attorney who understands the company’s financial situation and the family dynamics. This person should have knowledge of the tax and related issues, including corporate, partnership, limited liability company, and employee benefit law and knowledge of the estate planning and administration issues.

A family needs to consider commencing a succession business plan at least ten years before retirement and implementing new management five years before the anticipated retirement date. This is important since many family businesses do not survive the death of the founder because of inadequate planning and insufficient cash to pay taxes and maintain the business’s viability. Many businesses will close or be liquidated in order to meet the needs of the family.