Have you figured out who will take over the family business? Are you or your parents prepared to transition the business to the next generation? How will family members be part of the transitions? Do you have a plan to minimize tax exposure?
These are just a few of the questions that must be addressed about the future of any family business, reports the article “Don’t be a failed family-business statistic: Plan for your farm’s future” from High Plains Drifter. While the High Plains Drifter article speaks specifically about a family farm, similar issues are faced by family-owned businesses, such as a restaurant, coffee shop, auto body shop, high-tech start-up company.
One of the hardest parts of any business is decades of hard work with less than stellar statistic for a viable entity under the ownership of the next generation. Only 30% of any kind of family businesses survive to the second generation.
You need a long-term strategy and planning that needs to be started long before any member of the family begins thinking about retirement. You’ll also need good advisors, including an estate planning attorney, accountant and possibly a banker.
What is a succession plan? A succession plan is a forward-looking strategy that prepares the individual and their family for the change in ownership, including development of leadership to avoid family disputes, manage tax consequences and ensure that the business smoothly transitions to the next generation of owners.
The estate plan provides the mechanics to implement the succession plan. It can be complicated, so an experienced estate planning attorney who has worked with business owners will be invaluable.
Here are three key areas where guidance is critical:
On-business and off-business heirs. How do you balance the inheritance of children who remain working in the business and those who chose to pursue other occupations? An objective viewpoint is needed, and a calm head. There are different ownership structures that can be used to define the roles and expectations for both types of heirs.
Smooth financial transition. It is important to lessen tax liability and maximize benefits. Cash will be needed to pay estate taxes. This is where many family businesses are lost: a key asset may have to be sold to pay the tax bill, and it dampens the chances of success for the future.
Address financial needs of current and future generations. Can the business support multiple generations? What does everyone need to continue working in the business, and how will the income be generated?
Family businesses that survive to the second or third generations don’t happen by accident. Succession plans need to be created and then they need to be reviewed every few years. If you have a will or an estate plan, if you haven’t updated it in five years, it’s time to review it or create one.
Reference: High Plains Journal (Nov. 8, 2019) “Don’t be a failed family-business statistic: Plan for your farm’s future”