Family-owned businesses, economically disadvantaged businesses (DBE), LGBT-owned businesses (LGBTBE), minority-owned businesses (MBE), Veteran-owned businesses, and Women-owned businesses (WBE) are just a handful of small business types that could be impacted in the event of a founder or majority owner’s incapacity or death.
Inc.com quotes the U.S. Bureau of the Census stating that about 90% of American businesses are family-owned or controlled. These family business industries range from agriculture to manufacturing, technology to hospitality.
Are you surprised to learn that family businesses tend not to outlive their founders? In 2010, Family Business Center reported that the average lifespan of a family-owned business is 24 years. About 40% of U.S. family-owned businesses transition into a second-generation business with only 13% of those being passed down successfully to a third generation. Just 3% survive to a fourth generation or beyond according to Businessweek. Failed transfers are often traced to three causes: people, taxes, and cash (source).
How To Help Your Business Survive
Without “family” a family-owned business risks viability. It is often members of the family that hold a working knowledge of day-to-day operations and understand the relationships that built and run the business. Retirement, disability, incapacity, or death of the business owner(s) can be a trigger for a business transfer.
Before sitting down and mapping an entire business succession plan, it helps to have the answers to a few questions:
- If you didn’t name a successor, who would be asked to assume your role after you (spouse, child, non-family member, key employee)?
- If you did name a successor, would it be that same person? Why or why not?
- If your successor isn’t your spouse or family, will they remain financially dependent on the business?
- What arrangements have or could you make for the inheritance of your heirs who are not active in the business?
- Can your business be impacted by your in-laws, pre-nuptial agreement, divorce, or other investors?
- If you could envision the second-generation transfer of your business, what provisions have you made to help it succeed?
How To Help Your Business Thrive
Estate taxes are a pesky topic. Leaders of congress and the White House regularly modify these rules following each election. You can stay current with these changes by bookmarking this explanation from the Internal Revenue Service (IRS). As a business owner you are tasked with monitoring the legal climate of the country as well as your geographical area of business. If you remain proactive in estate-liquidity planning, your family may be able to avoid selling the business to meet an estate tax cash call.
Coordinating financial and estate plans seems like a tall order, though simply getting the right minds into one room can establish surer footing. Our attorneys can meet with you and your certified financial planner to efficiently form a strategic plan that considers financial and legal angles. We want to be ensure your cash can fund your goals – think people-planning objectives, liquidity for estate taxes, and more. Tactics like using the proper amount of life insurance may effectively be used to fund such matters.
Business Buy-Sell Agreements (BSA) are a lifetime contract that provides for the transfer of a business interest upon the occurrence of one or more triggering events as defined in the contract itself. That is a wordy way of saying that should you (an owner) retire, become disabled, or pass away an interest in any form of business entity can be transferred under a BSA to include a cooperation, partnership, or limited liability company (LLC). If a client is looking at BSAs specifically (beyond the coordination of estate planning) we refer them to attorneys who focus primarily on business matters.
Business Succession Planning Considerations
Simultaneously crafting your personal estate planning and business succession planning drives a strategy that serves you personally and professionally.
Building a dual strategy is most cost effective. Should you make changes to one plan, the other can quickly get updated too. If you join and continue our maintenance program these costs don’t inflate from the day you sign on the line.
A business succession plan does not need to call out plans for your business to continue. Perhaps you want to have your business sold, liquidated, or closed when the time comes for you to leave the command post. This plan still requires mapping for maximum efficiency and benefits.