BUSINESS SUCCESSION PLANNING

According to Family Business magazine, most family businesses do not survive from generation to generation. Only 30% of family businesses survive to a second generation, 10% to a third, and 4% to a fourth.

Why don’t more family businesses survive?

It is generally a combination of factors stemming from the original owner’s failure to plan for its future. If the original owner fails to take the proper steps, it is likely the family business will fail or be sold off after he or she dies and cause financial hardships for the whole family. In order to survive, the owner must be choose his replacement and put his replacement in the position to steer the company.

For the new manager to succeed, the personal and financial needs of the family members must be taken into consideration. And of equal importance, the original owner must establish an estate plan that minimizes estate taxes. A good estate planning attorney can help the owner draft the proper agreements and trusts for a successful business transition.

I am a strong proponent of business succession planning because I saw first hand what the failure to plan did to my mother’s family. My grandfather, although a very successful business man, failed to plan for replacement management and didn’t have any estate plan other than a will.

He owned a large Texaco Distributorship in Michigan and during his later life, both his sons worked at the company. When he died, there was a huge estate tax bill based on the value of the company and his other real estate holdings. The will provided that all four children were to take equally. However, with estate taxes due, most his assets other than the company were sold to cover the estate taxes and all four children retained equal interests in the Company. His sons continued to run the company, but they fought about control and eventually ran the company into the ground. The end result was that his daughters received very little inheritance and family relationships were hurt.

A business succession plan must meet three goals:

(1) determine who is the best person to take over management of the business and establish a means to affect this;

(2) take into consideration all family members’ feelings about this plan and treat everyone fairly;

(3) minimize estate taxes.

What could have prevented the earlier scenario?

One son was best suited to run the company. If my grandfather had planned ahead, he could have set up a plan whereby the most qualified son took over management. The other son could have been bought out. To assure this transfer of power, the managing son and my grandfather should have drafted a buy/sell agreement that would state that upon my grandfather’s death, the managing son has the right to buy a managing portion of the stock.