How to Plan for Family Owned Business Succession

How to Plan for Family Owned Business Succession

How to Plan for Family Owned Business Succession

While implementing a business succession plan is not required for most companies, it is always a good idea to have one, especially when dealing with a family-owned business. The reason is that a succession plan outlines what will happen to the business upon the death or retirement of the owner/head. In family operated businesses, this is usually passed down to the next of kin – but what happens when there is no next of kin? This is exactly what makes a business succession plan so important. Many estate planners recommend that implementing a detailed plan is extremely beneficial, not only for the business, but for the family as well. Currently, there are over 5 million family-owned businesses in operation across the United States – generating over half of the domestic products sold each year. What will happen if just 20% of these businesses die out, solely due to the fact that there is no one left to leave the business to?

Important Benefits of a Business Succession Plan

Protecting the future of a business is just as important as maintaining the daily tasks. When dealing with family-owned businesses, the odds of the business surviving through generations drops dramatically each term. For example, while an average of 30% of businesses are successfully passed down to the first generation, only 12% survive through the next. This happens for a variety of different reasons; however, all are guarantees to fall under one of two categories. Of course, you have to take into consideration family issues that may arise that are unrelated to the business itself. Then you must consider the issues that may arise within the business as well. Although the best way to conduct and operate a family-operated business is to completely separate the family and business while at work, this rarely ever happens.

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Many families may find that defining roles can sometimes pose an issue, as you may find a younger sibling in higher positions than older siblings or family members, posing a conflict in rapport. As if these issues weren’t enough stress to deal with, passing a business down through generations also attracts a tax burden as well. There are certain fees and taxes that are associated with business transition and inheritance, which can put the business at risk of bankruptcy. The defining line between the two, in most cases, is the size of the business itself. This can determine how much capital the business has to survive – even after taxes. The size of the business can also play an important role in the business succession plan, since there are more administrators available in larger companies that are trained and declared in times of new ownership.

Key Points:

  • Prepare a succession plan that clearly defines the roles of future generations based on advancements in technology, market trends and evolution.
  • Smaller families should anticipate future stop-walls by looking for outside ties to the family name that will be able to take over at the end of the bloodline.
  • Follow the golden traits of replacement in regard to third-party heirs – confidence, commitment and chemistry
  • Update your succession plan at the end of each year to ensure it remains accurate and optimized to the current times.

Things to Consider for Effective Succession Planning

1. Educating future generations about the family business, industry and business management skills
2. Implement and maintain a training program within the company that gives employees, administrators and executives the opportunity for future ownership consideration
3. Implement a mentorship program to encourage potential successors despite blood relation
4. Create multiple alternative business plans to protect the business in the event of transition successors, including groups of siblings or groups of cousins.

Original Article Source: bizjournals

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