Even if your family business is something less than a global media empire, succession planning can be stressful. Family businesses span every sector of our economy, and generate approximately one-half of the U.S. gross national product annually. Almost one-third of the Fortune 500 are family businesses.
One of the problems faced by family businesses is that they tend not to outlive their founders. Unfortunately, two-thirds of businesses fail following their initial transfers. This is often the result of poor succession planning. It is important to understand the business, financial and personal goals underlying the transition of any family business, and making sure that proper planning has been done to ensure success.
One reason for the failure of business transfers is because small business owners, family business operators and local entrepreneurs often perform many different business functions that are not easily replaced by one or two other people.
Additionally, the family element in every family business can mean the difference between its success or failure during the transfer process. The sudden, unexpected retirement, disability or death of the business owner are all common events that can trigger a business transfer without forethought.
When thinking about the future, here are the questions business owners should consider and prepare for:
1. If you die or become incapacitated unexpectedly, who can operate and manage your business from an administrative, sales, marketing, operations and accounting perspective, among others? Even if it’s only temporary or to preserve company value while contemplating a sale.
2. Do you have a management succession plan? Have you discussed that plan with key employees and family members?
3. Do you have children or employees who are prepared to step into your business role? Do they have the requisite experience and licenses to be effective in the role?
4. If you die or become incapacitated unexpectedly, are there resources to hire or promote someone to replace you? Is there a gap-filler before the new employee steps into your role? Is your spouse authorized to sign checks, make bank transfers or perform other corporate tasks, for example?
5. If you die or become incapacitated unexpectedly and have business partners, will your business partners fairly compensate your family for your partnership interest? Do you have a buy-sell agreement? Do your heirs have the right to sell your interests?
6. Will your spouse be financially dependent on the business income in the future?
7. Do your business partners have the resources or insurance to provide compensation to your family? Do you have key person insurance?
8. Do you have a plan to transition the business to your heirs and, if so, when and how? Are you confident in your heir’s desires and capabilities? Are you trying to preserve your legacy for your grandchildren? Have you considered grandchildren that may want to run the business in the future?
9. If you plan to transition the business to only one heir, do you plan to provide a similar inheritance to your other heirs? Will the company be managed for the benefit of additional family members, with the working heirs receiving a salary?
10. Are you and your spouse in agreement regarding the distribution of the business or business assets to your heirs? Have you in-law proofed your estate?
11. If you transition the business before your death, do you require certain distributions and profits from the business to support you in your retirement?
Tough questions must be asked and answered. Discussions with an estate attorney, financial planner and tax advisor can help you develop a strategy for long-term financial success for your family. JN
Allison L. Kierman is the managing partner of Kierman Law, PLC, an Arizona estate planning law firm. Visit kiermanlaw.com.