Keeping it in the family: suggestions for taking the business to the next generation.

• Author: McKimmie, Kathy
• Position: ESTATE PLANNING

ALTHOUGH NEARLY A third of family-owned businesses survive into the second generation, only 12 percent make it into the third and only 3 percent beyond that, according to the Family Firm Institute, a membership organization for professionals serving these businesses, including lawyers and financial advisors.

There are a host of reasons for these dismal statistics, but lack of succession planning is a major culprit. Often, it's put off because parents are reluctant to talk turkey with their children to find out if they're really interested in continuing the business, or to make the difficult decision about which child should be in charge.

"The tough part that I've found is when the mother and father have three kids, one of whom is in the business and the business constitutes the bulk of their estate," says John McBride, partner with Ball Eggleston Bumbleburg McBride Walkey & Stapleton in Lafayette. "They want to treat them equally and that poses challenges." Two kids may live in Oshkosh, he says, have no interest in the business, and are not satisfied with owning a part of something that provides little or no income. "They don't get a dividend check like they would if they were invested in IBM."

Mark Witmer, partner with Beckman Lawson in Fort Wayne, echoes that problem. Often the active child with the voting interest will want to plow profits back into the business as opposed to giving dividends to all the owners. "That's where the strife comes in. Others would rather have the money." The active owners are getting a salary and looking out for their own children. It stands to reason then, that if you were one of four owners and had no salary or dividends from a business worth $10 million, you'd prefer $2.5 million cash, he says, rather than a 25 percent interest.

So how do you avoid a family fight? It's easiest, of course, if the business is not the only major asset. Then the child or children not interested in the business can receive the other assets of equal value.

"In almost all family-business-succession issues, life insurance plays an important part," says Kristin Fruehwald, partner at Barnes & Thornburg in Indianapolis. Life insurance can fund a buy-sell agreement that pays one child cash and allows another child to be left the business.

Get your plan in writing, urges Andy Mallor, partner with Mallor Clendening Grodner & Bohrer in Bloomington. "One of the biggest mistakes family businesses make is they don't document planning as well as non-related people will do."

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