Family Business Succession: The Importance of Having a Plan
By Rudman Winchell Attorney Jonathan P. Hunter
Although the idea of the family business is firmly rooted in American culture, the survival rate for family businesses in America is startlingly low. Less than a third of family-owned businesses survive into the second generation. Twelve percent of family businesses make it to the third generation. Only a mere three percent see a fourth generation.
Of course, businesses of all kinds face challenges, and many fail. Family businesses, however, face unique difficulties that threaten the transfer of the business from one generation to the next.
Financially speaking, the family business owner must balance his or her own financial needs, and that of his or her spouse, upon exiting the business, against the continuing needs of the business. There is also an emotional element that must be considered. The owner must contemplate the potential for family conflicts, particularly when some children are involved in the business and others are not. Some families simply may not have a qualified successor.
In spite of these and other challenges, many business owners resist planning their inevitable exit from the business. Many owners would much prefer to immerse themselves in the day-to-day operation of their businesses than confront sometimes uncomfortable questions about the future of their businesses and families. Some simply may not realize the need for early planning. The end result can be financial hardship for the business owner and the family or failure of the business.
Family business owners should therefore consider investing a small portion of the revenue of the business to gather a team of experts to assist them in creating and executing a succession plan. There is no one-size fits all approach to family business planning, and successful plans draw on many different disciplines, including law, accounting, and financial services. The expense of business planning is often tax deductible.
A successful long term succession plan, however, is not simply about the technical details of the plan. Engagement of the family in discussions surrounding the business and the plan is essential for management of expectations of family members and fostering an environment of communication and trust.
Even the best laid plan cannot anticipate every economic or family crisis the business might face in the future. A well-considered plan, supported by a strong family governance structure, however, can provide the tools necessary to shepherd the business through the generations.
This is only a brief summary of the benefits of creating a succession plan. There are many factors and options to consider before you move forward with a plan. If you own a family business, it would be advisable to consult legal and financial professionals to help navigate these options and the requirements involved in putting a plan into place.