Ownership Succession Planning for Family Businesses

Ownership Succession Planning for Family Businesses

More than four out of five family businesses are still controlled by their founders, but there is a coming wave of change in the family business marketplace that brings the need for ownership succession planning to the forefront of priorities. About 40% of family businesses expect the leadership of their companies to change by 2008; well over half of family businesses expect a leadership change by 2013. When the topic of family business succession planning arises, it's usually ownership succession planning issues about which the family or the family's professional advisers are thinking.

About a third of family businesses have a chief executive who's older than 60, with an average age of 54. 11% are older than 71 years old. Regardless of a CEO's age, there it is never too early to begin family business succession planning. 88% of current family business owners believe the same family or families will control their business in five years, but succession statistics undermine this belief.

Only about 30% of family and businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond. The statistics reveal a disconnect between the optimistic belief of today's family business owners and the reality of the massive failure of family companies to survive through the generations. Research indicates that family business failures can essentially be traced to one factor: an unfortunate lack of family business succession planning.

The current state of ownership succession planning among family businesses is decidedly mixed. About two-thirds of family business owners report a good understanding of the amount of estate taxes due upon their deaths, but about one in five have no estate planning at all! Over one in three junior generation family business members have no knowledge of their senior generation's transfer plans.

The ownership succession planning issues that seem to be the most common areas of contention or omission in family business succession planning are:

Technical mistakes: including outdated wills and other estate planning documents, improperly titled assets, and insurance owned incorrectly.
Many family business owners have gone to their attorneys and CPAs, engaged them in a vigorous round of estate planning, executed the documents, and breathed a huge sigh of relief. Fifteen years later, they realize their circumstances have changed drastically, and yet they haven't updated their documents to take the new facts into account. Ownership succession planning documents must be constantly reviewed for relevancy in a changing business environment.

"Planning in a vacuum." The old fashioned way of doing family business succession planning was for the attorney to talk to Mom and Dad, find out what their wishes for the future were, and to document those wishes for the benefit of the entire family. No one talked to the children or in-laws about ownership succession planning - even if the "children" were 45 years old and ran the family enterprise - to find out what they wanted or expected. No one bothered to consider what successful outcomes looked like to other stakeholders besides just Mom and Dad. For today's family companies, planning in a vacuum simply does not work, and the views of all stakeholders are taken into account.

Leaving the business to the surviving spouse: Because of the unlimited marital deduction, estate and tax attorneys commonly leave virtually all assets to a surviving spouse either outright or in trust. Technically, this is a zero tax plan and makes perfect tax avoidance sense. However, this is rarely a healthy family business succession planning strategy. Upon interviewing hundreds of people both before and after the deaths of other family members, the vast majority of surviving spouses want nothing whatsoever to do with the business in the absence of their husbands or wives. Leaving the business to the surviving spouse is tax wise but often foolish from the standpoint of family business succession planning.

The following are some time tested, proven benchmarks for gauging the quality of your ownership succession planning strategies:

1. Time needed = ten years or more
2. Documentation and planning necessary in the "drop dead plan"
WillTrustShareholder restriction or buy-sell agreementOwnership succession planManagement succession planLiquidity planGet home from the funeral plan
3. Documentation and planning necessary in the lifetime plan

Management succession plan covering exit of senior generation family members and entry of junior generation family membersOwnership succession plan covering the operational transition from senior to junior generation family membersFinancial planning for the benefit of senior generation family membersFinancial planning and pro forma analysis for the benefit of the corporation (which might need to financially support two or more generations).

Family business succession planning
- and more specifically
- ownership succession planning for family companies is a constant topic of discussion.

Using the benchmarks above, you and your advisers can assess the quality of your family and business continuation strategies.

From: www.familybusinessinstitute.com/succession-planning/ownership-succession-planning-for-family-busin.html