Family Businesses: What Makes Succession Planning So Difficult?

Helping Washington Families with Business Succession

According to the Family Business Institute, there is a significant disconnect between what family business owners believe about the future of their business concerns and reality: 88 percent believe the same family or families will continue to control the business in coming years, while studies actually show that only about 30 percent of family businesses survive into the second generation, that 12 percent are still viable into the third generation, and that only about three percent make it into the fourth generation or beyond.

Business experts tend to focus on one common denominator in many of the failures: A lack of family business succession planning. Why is succession planning so difficult? Here are two dominant factors to consider:

Factor No. 1: Recognize That Succession Planning and Estate Planning Are Intertwined, But Not Identical

Perhaps the most common problem in developing a succession plan is that the business owner fails to differentiate sufficiently between his or her thoughts about succession planning and other thoughts that he or she may have about sharing the “fruits of labor” with the family. Succession planning and estate planning are intertwined and related; they are not the same thing. Succession planning seeks to promote the success of the business. Estate planning has other concerns.

For example, it may be entirely fair and equitable to share one’s estate among one’s four children. Sharing the actual business ownership among the four may be a horrible idea, particularly when only one or two are involved in the day-to-day operation. Most succession planning experts advise against gifting or granting voting shares to heirs who aren’t directly involved in the business enterprise. Instead, the business owner (or owners) could purchase life insurance with an appropriate valuation for those not involved in the business, leaving the actual business to the active family members. Another alternative is to leave the “uninvolved” heirs non-voting shares. That way, they could benefit from the growth of the business, but not be able to micromanage their relatives who actually know what is going on.

Factor No. 2: Things Change: “Ponder Life’s Vicissitudes”

Business owners can sometimes get so caught up in their own plans, their own goals, and their own aging process that they fail to remember that those around him or her are subject to change as well. The business owner should always “ponder life’s vicissitudes.” The loyal, intelligent, generous child who is currently involved in the business may not always be available. Tragic accidents and illnesses can come along. Just as unfortunate – the involved child may still be available to the business enterprise, but may have his or her own financial world turned upside down by a divorce. Is the business owner satisfied with sharing ownership with a former daughter-in-law or son-in-law? These sorts of issues can be handled with properly drafted succession documents.

Don’t Wait Too Long To Plan for Succession

Most financial and legal experts recommend that business owners consider and determine succession issues at least seven years before the founder or founders plan to retire. Most businesses discover that they need to hire two types of advisors: (a) independent CPAs and (b) attorneys to assist in crafting “the plan.” CPAs and financial experts can help the owners assess the value of the business; skilled business attorneys can make certain all relevant issues are considered and can draft appropriate documents to meet the needs of all concerned.

Bolan Law Group.: Skilled Legal Counsel for Succession Planning

Bolan Law Group. has more than 30 years of combined experience providing both businesses and families with quality services throughout the Pacific Northwest. Adept at advising on any business-related issue, we can assist in startups, business operations, the legal/regulatory landscape, and other important matters. Because of our firm’s extensive experience in business litigation, we are also better equipped than many law firms to help you avoid expensive litigation. For assistance with any business agreement or any other type of business issue, contact us on the web, or call our office at (253) 470-2356.

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