BUSINESS PLANNING AND SUCCESSION
I did a presentation for Crawfordsville Main Street dealing with Non-Tax Aspects of Business Planning. In my research for that presentation, I came across some very interesting statistics relating to family businesses in the United States. There is actually some dispute as to what constitutes a family business. For purposes of this article, a family business will be defined as a business where a family has the effective control of the strategic direction of business and the business adds significantly to the family’s assets, income or identity in the community. With this definition, a family business can be a small “mom and pop” store, or a large Fortune 500 Company. More than 60% of all businesses in the U.S. are family businesses. These family businesses generate approximately 40% of the gross domestic product in the U.S. Small businesses employ up to 59% of the total workforce and create a large percentage of new jobs in the U.S. Family businesses are the fuel that helps run the U.S. economy.
It is also estimated that 70% of family businesses fail to survive into the second generation. It is further estimated that 87% of family businesses fail to survive into the third generation. The two primary reasons for this high failure rate are that business owners fail to plan adequately for the succession from the older generation to the younger generation, and also fail to do adequate estate planning to minimize income tax and transfer tax consequences. If you are a small business owner, you should ask yourself some basic questions. Should my business be sold or should it go forward? If it is sold, what will happen to family members? If the business continues, what is required to make the transition successful? How much change is going to be required in either the way the family runs the business or the business itself, and what is the best way to accomplish these changes? What personal and business factors are involved which will affect the possible succession?
Once you have asked yourself the basic questions relating to business succession, then you should start to look to develop a plan for succession. Consider all or some of the following steps in developing your succession plan:
Get a commitment from all family members to work on succession planning;
- Develop a plan for family members to set aside competitive ways and find constructive ways to work together;
- Adopt a business planning process that begins with a mission statement and strategic plan;
- Create a personal development plan from family members who work in the business;
- Develop an appropriate governance structure for the business as well as a family forum to deal with family problems;
- Put in place legal and financial structures to implement your succession plan;
- Create a culture in which key employees (whether they are family members or not) are expected to be owners.
There are some other basic considerations that you as a family business owner will want to consider. You may want to put a team in place to help you with your business planning. Your attorney, your accountant and financial advisor may need to be on your team. You also need to look at what type of business entity you are operating under. If you are a sole proprietorship then you may want to consider forming a limited liability company or a limited liability partnership. You should also consider getting started with business planning by doing some simple estate planning. If you have done no estate planning whatsoever, you should consider executing a Last Will and Testament and Durable General Power of Attorney. You may also want to consider doing some gifting of business interests to the next generation and at the same time put into place some type of buy/sell agreement as it relates to the business.
I have not even touched upon in this article the topic of possible income and transfer tax consequences in business succession planning. If you are a family business owner, get your business planning team together and start thinking about how you can avoid the dismal statistic that 70% of family businesses fail to survive into the second generation.
This article is published for information purposes only. It is not intended nor is it to be used as a substitute for independent legal advice.
Stu Weliever practices law with HENTHORN, HARRIS & WELIEVER, P.C., 122 E Main St, Crawfordsville, Indiana, and can be reached at (765) 362-4440 or at firstname.lastname@example.org.