Most people who start family-owned businesses do so with the future of their family in mind, with visions of providing a legacy and income stream for their children, grandchildren, and beyond. Yet research indicates that only thirty percent of family-owned businesses survive the transition from the founders to the second generation of owners; the survival rate decreases with each succeeding generation. A lifetime of hard work can dissipate in a moment without careful planning.
If you have a family-owned business that you hope to pass down to your children and grandchildren, you cannot assume that the transition will happen naturally when the time comes. In this situation, as in many others, failure to plan equals planning to fail.
Why Is Business Succession Planning Important?
A succession plan involves developing a strategy that will allow you to maximize the value of your business and transition out of the business on your terms. An important part of the process involves identifying prospective future leaders for the company and preparing them to take over. Succession planning is particularly important in family businesses because it’s likely that the founder of the business has become the public face of the business as well as the repository of essential knowledge of the company’s operations. Therefore, it’s critical to groom future leaders so that they will both develop the competency to run the organization’s internal operations and be able to conduct business in the way customers and clients expect.
The identity and skills of the next generation of leadership cannot be taken for granted. It’s critical for small business owners to confirm that their intended successor wants to continue operating the business and has the ability to do so. It may be difficult to have the conversation that reveals that one’s adult child lacks the desire to take the helm of the family business. However, it is disastrous to assume that he or she does, only for the position to be rejected when the time to assume leadership arrives. Business succession planning necessarily requires involving prospective leaders in the planning. You may discover that, rather than transferring the business to your children, it would be wiser to sell it to key employees, or to seek a sale to an outside buyer.
In addition to answering the question of who will take over the business, business succession planning helps to answer the question of when the transition will take place. Some business owners want to keep control over the business until their own death or incapacity. Others want to retire, secure in the knowledge that the business is in competent hands. Still others don’t want to step away completely, but prefer to take more of a back seat to the new leadership. When you want to transition will have an impact on how you transition.
Tax Strategy and Family Business Succession Planning
In addition to leadership and transition planning, tax planning is an essential component of a family business succession plan. Tax planning affects the value of the company and the amount of wealth that is transferred to the next generation, either through the business itself or through financial assets. Without proper tax strategy in place, your heirs may find it necessary to sell assets of the business in order to pay estate taxes. This could cripple the company’s ability to function, effectively disabling everything you’ve worked for.
If it’s beginning to sound like family business succession planning is inextricably linked with your estate planning, you’re correct. An experienced estate planning attorney will take into account the needs of your family and those of your business and help you establish a plan that can help protect the future of both. Contact the experienced estate planning and probate attorneys at Davis Schilken at 303-670-9855 to arrange a consultation at one of our two locations in The Denver Tech Center and Golden, Colorado. Our attorneys can help you evaluate your business succession goals and create a plan to achieve them on your desired timetable.