We know that about ninety percent of all small businesses are family-owned or controlled and fail to make a successful transition to the next generation. However, thorough and thoughtful advance planning, called “succession planning,” can dramatically improve the chances for an effective transfer of ownership and management of a business. Succession planning should contain business, tax and psychological components addressing the particular needs of the family business.
What are family businesses?
They may be businesses of any size in any industry which are owned by a few persons and usually are controlled by a very few persons.
Who are the owners?
The owners of the family businesses are the persons whose wealth is concentrated in the ownership of the business.
Why is planning desirable?
It is rather easy to accomplish passing wealth in the form of investments no matter who the intended recipient is. Family businesses are very different. They require management. Consequently, the owner must not only decide who will inherit his or her control but who can operate the business, which typically comprises a large part of the owner’s wealth, all while trying to treat family members fairly. To successfully solve such problems is the object of the succession planning process.
When is planning appropriate?
When a business is successful enough that its long-term prognosis is good and identifiable, planning should commence.
How is the planning accomplished?
The persons who own the business must take the lead in assembling a planning team consisting of advisors in whom the owner has confidence. Typical members at the planning table are a lawyer experienced in these problems, an accountant with broad experience in business valuation and financial operations, financial advisors for the owners, and such other advisors as the owners deem appropriate. The owners must accept the need to plan for their replacement, realistically assess the prospects for the business, determine the value of the business, select their successors, and assess the ability of the business to generate earnings sufficient to pay the purchase price and/or other forms of compensation to be paid by them, as well as provide adequate income to their successors.
For assistance in these matters, please call an attorney in the Family Wealth and Estate Planning Group at Carlile Patchen & Murphy LLP.