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Monday, January 29, 2018

Business Succession Planning

Do you have a family business?  If so, you face some unique challenges to protect and preserve your business for your family.  An owner’s death, retirement, divorce or disability can create serious problems for a family-owned business.  Your business, that took years to build, could be destroyed overnight. 

In the United States more than 9 out of 10 businesses are family-owned or controlled.  Yet the sad reality is that most family businesses do not outlive their founders.  More than two-thirds of all businesses fail after control transfers from the founders to their children.  The likelihood that a family business survives after reaching the grandchildren is extremely low.  Why such a dismal success rate?  There are a variety of reasons, but often the failures can be traced to three causes:  people, planning, and cash. 

People.  The personalities in every family business can mean the difference between its continued success and possible failure.  If a founder wants or needs to retire, who has been groomed to step up?  Will it be your spouse, an unrelated partner, or one or more of your children?  And if more than one person is to take over, do they get along? 

Planning.  How will the retiring founder fund his or her retirement?  Careful planning about how and when the transfer is accomplished should take into consideration cash and taxes as well as other personal issues. Will the retiring founder remain involved or provide continuing consulting services?  Does the business transfer as the result of a sale or a gift?  How should the founder’s children who are not becoming part of the business succession plan be treated?  Where will their inheritance come from?  What are the consequences of a non-involved son or daughter inheriting partial ownership of the business that a sibling or unrelated third party may be running? 

Cash.  When the owner dies or retires, the plan to transfer a family business to others to own and operate is largely dependent on cash.  How is the price set? Is there a buy/sell agreement in place?  Does a surviving partner have rights to buy out the departing owner’s interest in the business?  Is there life insurance in place to provide the cash when it is needed?  Without careful cash planning, the business and surviving owners may find themselves in a tough position to come up with the assets to fund the retiring owner’s departure, or buy the deceased or disabled partner’s interest in the business.   

Speak with a qualified estate planning attorney to discuss your unique business situation.  Business succession planning cannot guaranty a successful transition, but no planning will make the likelihood of success more remote.  

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