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Transitioning your family-owned business requires careful planning

General Business News

February 2012

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Transitioning your family-owned business requires careful planning

According to the Small Business Administration, approximately 90 percent of businesses in the United States are family owned. Many of these are small businesses, but about one-third of them are Fortune 500 companies. Statistics show that the nearly 20 million family-owned businesses in the United States create more than 80 percent of all new job opportunities and account for more than 60 percent of the country’s gross domestic product.

Despite these impressive numbers, only an estimated 30 percent of family businesses stay afloat after the transition from the first generation to the second. The survival rate for each succeeding generation is even lower.

The low survival rate of family-owned businesses after being passed to the next generation underscores the importance of long-term succession planning. Careful planning prior to passing control is important for any business, but for family-owned operations it is vital for the continued success of the business. And the importance of having a successful transition is further amplified during a sluggish economy, when good business decisions are more crucial than ever.

The lack of a transition plan dooms many family-owned businesses to ultimate failure. Without a solid plan, the business might fall victim to a new owner who is either not interested in continuing in the previous tradition or who does not know how to do so. Lost in the transition might be the business’ former values, mission or overall philosophy. Without a viable transition plan firmly in place and in writing, family members might disagree over the direction of the company, eventually using up its resources until the business fails and family unity disintegrates.

Proper succession planning is not easy; however, it offers a unique opportunity. Not only can it ensure a smoother transition period, it can also help the business thrive in the future by putting qualified leaders in charge while maintaining the company’s established vision.

How can you avoid the complications and possible damage to your family-owned business that a generational handover can entail? First, talk to your financial advisor, tax professional, attorney and other experts. These trusted professionals are in the best position to give you advice based on your unique situation.

Following are a few general guidelines to help keep your business in the family – and to help keep your family in the business.

Find and Develop New Leaders

The first step to successful succession is to identify which family members should manage your business after the transition. For example, who will head up the accounting, customer service, sales, marketing and other departments? Who will take ownership of the company?

Since it can be difficult to objectively analyze the qualifications and abilities of your own children or other relatives, it might be necessary to hire an outside consultant to help assess each candidate’s strengths. If potential business leaders are identified early on, they will have time to get the appropriate education, experience various roles within the company, participate in aspects of the decision-making process and learn from senior personnel. A candidate might even take a job at another company to gain confidence by finding success outside the family business. Each candidate can be groomed to fit his or her anticipated role. Any potential problems can be identified well in advance of the succession.

Knowing who will be charge of what, based on objective assessments, experience and proven aptitude can help avoid sibling conflicts.

Keep Valuable Non-Family Employees Happy

Bringing in a family member to lead the organization might alienate loyal employees who believe that they are better qualified. In your succession plan, find a way to avoid losing important non-family employees by offering incentives that show you value their expertise and want them to stay.

Anticipate and Deal With Tax Implications

Passing your business on to the next generation can have complex tax implications. Proper estate planning is vital in order to leverage tax law to best benefit both your business and your family.

Consult with a tax expert to find out what to do to ensure the most advantageous tax situation.

Creating a generational succession plan for your family-owned business is more than just a strategic plan for continuing your business after your retirement or death. It is also a tool that can help create stability now by ensuring your employees and heirs that they will have an important role in the future success of a strong, forward-looking organization. Talk to a business, tax or legal expert for detailed information about succession planning for your family-owned business.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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