Family-owned businesses are often considered the backbone of the American economy, but the numbers don’t lie. According to the Conway Center for Family Business, just 30 percent of family-owned businesses transition to the second generation of ownership; 12 percent are still viable into the third generation; and just three percent successfully transition to the fourth generation. While there are certainly myriad reasons for the percentage drops, one of the key factors is the lack of a strong succession plan put in place by the owners.
Why do I need a succession plan?
Today, many family-owned businesses do not have an automatic “heir” to take over. Often, the next generation has a different career path in mind that does not include staying in the same area or the same field. It may be critical to the continuation of the business to look outside the family for the next business owner to lead the company.
How long does it take to create a succession plan?
Succession plans are not developed overnight – they come in phases, with some of the most successful versions brainstormed and implemented almost a decade in advance. Even if a business owner has no desire to retire, a succession plan proves vital in the case of death or disability.
An owner should start, first and foremost, by identifying the overarching goals.
- What does the owner want to happen to the business?
- How long does the owner plan to work?
- How long does the owner envision a transition period will take?
- To whom would the owner sell or transition the business?
Once these questions are answered a general outline can be formed and the business owner can then begin working with his or her CPA and attorney to document scenarios and structures based on different considerations. These considerations would then be recorded via a Buy/Sell Agreement, which would serve as the governing document for business succession.
Know the value of your business
Typically, the owner would require a certified business valuation to determine how much it is worth. From there, depending upon whether the business would be sold to family members, gifted to family members or sold to third parties, certain premiums or discounts would be applied. There are tax implications aplenty for any of these scenarios.
In a sale to a family member, an important consideration may be the length of the buyout, and how it coincides with the owner’s previously stated goals for remaining involved. In a gift to a family member, the transition may take longer in order to utilize annual gifting limits to avoid using the owner’s lifetime exemption, or to ensure the owner does not cede control of the majority interest until a certain point in time. In a sale to a third party, there are different tax ramifications for an asset or a stock sale, as well as in how the purchase price is allocated among sold assets.
Outside of the numbers, developing a succession plan in advance increases the likelihood of the plan coming to fruition, as the owner can spend the years leading up to its implementation grooming the successors. The owner can determine who is best suited for certain roles and establish a leadership or mentoring program. Plans tend to fail when they are not mapped out thoroughly in advance and anyone involved feels as if they are scrambling to put it in place.
Keep your business succession plan agile
Additionally, the plan should be reviewed regularly with the advisory team – the CPA, attorney and financial advisor – to ensure the owners’ goals are being achieved. Changes in tax rates via legislation and administrations could result in the need for plan modifications and remaining adaptable is important. When all of the above questions are answered, the steps are implemented, and the plan is communicated, a business owner can better ensure a smooth transition that helps accomplish the goals and increases financial security for all of those involved.
For over 30 years, Wouch Maloney has worked with business owners throughout the Greater Philadelphia region to create a succession plan that is right for their unique situation and goals. To learn more, reach out to Eric Seidman, CPA, MBA, or any of our CPAs or business advisors.
DISCLAIMER: All communications by Wouch, Maloney & Co., LLP intend to provide general information, as of the date of the communication, and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. Please be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.
