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Succession Planning for Family Owned Businesses

Small businesses are the engine running the U.S. economy, helping fuel the recovery.   According to the Small Business Administration 90% of all businesses in North America are family owned and managed. With the aging of baby boomers, a significant portion of the founders of these businesses will be retiring in the next five to ten years, presenting the potentially thorny issue of the transition of leadership.

This three part blog series will examine:

• Common Problems in Succession Planning,
• Questions Founders Should Ask Themselves
• Elements of a Strong Succession Plan

Five common problems in succession planning for family busineses

You’ve worked hard to build your business.  But have you done the critical step of planning for what will happen to the business when you are no longer involved?

Who will take over? How much will your heirs inherit when the time comes?  Is your estate protected from unnecessary taxes?

Is succession planning difficult? You bet it is.  Is it impossible? No.

We begin this discussion of the succession planning process by looking at some of the most common roadblocks that family businesses encounter in this important and sometimes emotionally charged process.

Challenge 1: Inadequate or nonexistent communication
If the family has a mission, then everyone has a role in its success.  But members of the senior generation and their children often don’t discuss exactly what the plan is, who gets what, what will happen when the business owner leave the company, or who will be responsible for what duties.

A transition in leadership is a new phase that requires greater communication so that a larger group of people have a shared understanding of what is happening and why. Long-standing habits of not communicating about certain activities need to be reconsidered in order to pave the way for a smooth transition.

Challenge 2: An over-promising parent
Entrepreneurs are typically very positive and visionary people who like to think big and make promises for the future. This has probably worked out fine for the founder’s entire career, but succession planning is a different stage of life. If the parent promises all things to all children but doesn’t put a plan in place to ensure promises are kept disaster may loom ahead. This can result in disappointment, anger and confusion when the owner retires or dies, which is the last thing the parent intends.

Challenge 3: Unprepared heirs
Parents risk leaving their heirs unprepared (and open to family conflict) when they don’t discuss the nature of their assets or other business-related matters. Sometimes they even set up trusts with which heirs are not familiar or leave their heirs assets without preparing them for the impeding responsibilities. Talking about these topics can be uncomfortable but only by discussing what will happen in the future can the younger generation prepare.

Challenge 4: Delayed planning 

There are numerous effective ways to help minimize tax and succession problems. Gifting stock as a way to minimize estate taxes is one of the most common opportunities, but it is only one of many planning decisions that require advance action.  Procrastination can make it difficult, if not impossible, to implement effective strategies when they are needed.  Early planning is essential, while may require the founder, family members and the non-family company leaders to grapple with a variety of issues that fall outside of the realm of daily operations.

Challenge 5: Lack of liquidity
Failure to plan ahead can cause hardship for families who want to buy out the business when the owner is alive, or for survivors who may be faced with massive bills and no way to easily pay them.  A family without sufficient liquidity to pay estate taxes could be forced to sell the family business to pay the taxes. Planning for business liquidity as well as retirement for the founder should go hand in hand if the business is to thrive with future generations.

The good news is that by planning ahead and understanding options and opportunities the needs of the family members can be accommodated. Having looked at the most prevalent pitfalls, the next blog in this series will discuss questions founders should ask themselves as the beginning of the succession planning process.
Need advice about succession planning for a family-owned or other business? Contact an advisor at Frazier & Deeter today.

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