How to pass along the best, most valuable business you can to the next generation
(Editor's Note: This is the first in a series of columns by family business leaders and advisors with information and ideas about topics unique to family businesses, developed in conjunction with the Conway Center for Family Business. Succession planning is vital to every family business, so we begin our series with this topic.)
Family businesses work hard, sometimes for many years, to establish a base, grow the business, and then pass it to the next generation. However, they often delay important decisions about how and when the business will transition and who will become the company's next leader.
Estimates show that by 2017, more than 40 percent of family business owners in the U.S. expect to retire, creating a significant transition of ownership of businesses. Unfortunately, less than half those expecting to retire in five years have selected a successor, according to Mass Mutual's American Family Business Survey.
The survey also found that nearly one-third of family business owners have no estate plan beyond a will. Another study, published by Family Business Review, found just over 30 percent of family owned businesses will survive into the second generation, and only 12 percent will survive to the third generation.
These findings are explicit evidence that lack of a solid and timely succession plan can be a key factor in the downfall of a family business.
For years, traditional estate planning sought to minimize taxes as its primary goal. While owners of family businesses certainly want to minimize their taxes, succession planning for these businesses also requires consideration of the continuity of the business value, multigenerational leadership training and family harmony.
If there is no plan for the transition of the business to the next generation, it can mean the liquidation of assets upon the owner's death. This can result in the lowest value for the business and have a devastating effect on the surviving family members and the company's employees.
Family business owners work hard and want to make sure they pass along the best, most valuable business they can to the next generation to ensure their security and their legacy.
So, what can be done to make sure this happens?
The value of the business should be determined by a valuation specialist . Then all options available for transitioning the business must be reviewed, including an assessment of the goals and needs of the owner(s) and their families, and the intended direction for the business. This can be a sensitive issue in succession planning. Using an outside advisor, such as an attorney or accountant, or learning about your options through a resource like a family business center or consulting group can focus discussions on the future of the business and work toward meeting everyone's mutual goals.
After the plan is in writing, reassess it periodically. Think of it as a "living document" that needs to be reviewed and updated depending on economic conditions, new regulations, changes in family members' participation in the organization, and other key factors that impact the family business. Determine if the plan still makes sense and make changes if the situation warrants.
Succession planning can ensure that the future of the business is sound, and it can also answer other important questions family business leaders might not have considered. It also helps minimize hasty decisions that are made during or after a crisis or unplanned event, which can lead to devastating consequences. Succession planning is the most important and effective way to plan for a sound financial future for the owner, the business, and the next generation.
For help identifying resources available to assist with your family business estate plan, contact the Conway Center for Family Business at 614-253-4820 or firstname.lastname@example.org.
Bea Wolper is a co-founder of the Conway Center for Family Business and serves as an Advisory Board member. She facilitates the Center's Women in Family Business and Succession Planning Peer Groups. She is a partner in the law firm of Emens & Wolper LLP, in Columbus, Ohio. Her practice focuses on succession planning, estate planning, general corporate law, contracts and the buying and selling of businesses, with an emphasis on family-owned businesses. Wolper and her husband, Dick Emens, the Center's Executive Director, co-authored Family Business Basics: The Guide to Family Business Financial Success.