More than 30% of all family owned businesses
survive into the second generation. 12% will still be viable
into the third generation, with 3% of all family businesses
operating at fourth generation level and beyond.
- Family Business Review
Inadequate estate planning and failure to
properly prepare and provide for the transition to the next
generation, coupled with the lack of funds to pay estate
taxes, were among the three leading causes for failure of
family owned businesses. In 47.7%, the transition and
ultimate collapse of the firm was precipitated by the
founder’s death.
- University of Connecticut Family
Business Program website
Over the course of their careers, Vernon Rudolph,
founder of Krispy Kreme, and Joe Robbie, owner of the Miami Dolphins
and the Joe Robbie Stadium, became two of the most successful
entrepreneurs in America. When Rudolph died in 1973, Krispy Kreme
was sold and eventually acquired by Beatrice Foods. Sadly, because
there was no business succession plan in place, Rudolph’s family
forfeited the Krispy Kreme empire. Likewise, in order to settle
estate taxes, the Robbie family was forced to sell their ownership
in the Dolphins and the stadium named after its former owner.
One of the primary reasons that businesses like these fail to
succeed from one generation to the next is lack of planning. Whether
you’re the owner of Krispy Kreme or the owner of a small, closely
held business, planning ahead is key to maintaining your business’s
success. This is where a business succession plan plays a critical
role.
A business succession plan transitions your company’s ownership and
management to the next generation, which will maintain your
business’s long-term financial objectives. With a succession plan in
place, you can transfer control according to your wishes, facilitate
a smooth and orderly transition to your successors, minimize the tax
liability for you and your family, and provide for their economic
well-being.
Without a plan, the future of your business is at risk. For
instance, if there are insufficient liquid assets in the estate to
pay Uncle Sam, your family may be forced to sell the business. A
succession plan, however, will prepare your family and business for
the inevitable tax liabilities that will be incurred upon such a
transfer of ownership.
Furthermore, a succession plan will also facilitate in the transfer
of ownership and control. If you plan ahead and select your
successor(s), you have the ability to coach them and they, in turn,
will be better prepared to manage your business at any given moment.
There are several factors that you will need to consider when
creating a business succession plan. For example, you will have to
determine what role, if any, the next generation will want to play
in the business; who is best qualified to take over the reins; the
viability of the business in the foreseeable future; and the tax
consequences of the transfer.
There are several transfer strategies that you can use to implement
the succession plan of your choice. The following list outlines just
a few of options that are available.
Outright Sale
You can sell your ownership in the business to a
competitor or third party buyer. Selling to a competitor can be
a lucrative option because a competitor may be willing to buy at
a premium in order to eliminate price competition, consolidate
overhead and cement their position in the marketplace. Of
course, there is the risk that the new owner may change the
business or even close it and you may not receive full value of
the business.
Outright Gift
You can transfer all or a portion of your
business to your heirs without compensation. You can also
transfer a portion of your business annually to take advantage
of the gift tax rules. Currently, you can gift up to $11,000 a
year per recipient without incurring gift tax liability. A
family limited partnership is often used in this situation.
Family Limited Partnership
Family members, usually the parents, place
assets into a partnership and gift minority interests to the
other family members. Parents can shift wealth to their children
and introduce them to the business, while they continue to
maintain control over the assets and reduce their tax liability.
Buy-Sell Agreement
A buy-sell agreement will identify a buyer upon
your death and will set a value, or the means by which to set
the value, for the stock in your business. The agreement can
outline triggering events (e.g. retirement, disability, death)
and terms for the owner or his heirs to liquidate or transfer
ownership interest at the set value. Often times, a family
member, who is active in the business, can purchase life
insurance on the parent/owner and use the proceeds to buy the
owner’s share of the business upon his/her death.
Employee Stock Ownership Plan (“ESOP”)
If no one in your family is willing or able to
take over the business and there are no prospective outside
buyers, an ESOP is an option. An ESOP is an employee benefit
plan that allows the company to make tax deductible
contributions that are invested in employer stock. The shares
are then allocated among the employee participants. You can
slowly transfer ownership to your employees over time in a
tax-friendly manner by reducing income, gift and/or estate tax
liability.
Regardless of which type of plan you select, a
professionally developed business succession plan will preserve the
legacy of your hard work and ensure the success of your business.
