Passing it on: planning is needed for a smooth generational transition of the family business.

• Author: McKimmie, Kathy
• Position: ESTATE PLANNING

IN OUR EVERYDAY LIVES, failure to plan can lead to missed opportunities and disappointment. But when we're talking about continuity of the family business, failure to plan can mean the forced sale of the company at a bargain basement price.

"Many people think it's estate taxes that doom businesses to fail whenever there's a transition," says R.J. McConnell, partner, Bose McKinney & Evans, Indianapolis. "But while that can be an obstacle, that can easily be dealt with with life insurance or financing the taxes if they have to. The bigger problem is just flat failure to plan."

He recommends three things to improve the chances of transferring the company to the next generation. "Step one would be to professionalize management, have defined lines of authority, and have the founder pick his or her successor and groom them over a period of time and not just dump it in their lap at the time that an unexpected death occurs." Tied to the first step, he says, is the owner's recruitment of a board of directors or at least an advisory board to help manage the transition. "That's probably one of the biggest nuances that has emerged over the last five years." A group of peers, made up of other business owners as well as the lawyer and accountant, typically makes up these boards.

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Succession danger. Seattle-based wealth management firm Laird Norton Tyee, conducted a nationwide survey of nearly 800 family-owned businesses in 2007 in cooperation with Seattle University and Oregon State University. It concluded that lack of a strategic vision, succession planning and governance policies could spell the end of some of those businesses in the near future. The companies, 122 of which were from the Great Lakes area that includes Indiana, had all been in existence for at least five years with revenues of at least $5 million. Interestingly, 70 percent of the businesses surveyed had already made it through at least one generational change.

The survey's bad news should be both a wake-up call and a checklist for action. Nearly 60 percent of majority shareholders in the family businesses were 55 or older and 30 percent were 65 or older, but less a third had succession plans and fewer than 40 percent had a successor lined up.

Ninety-three percent of respondents reported little or no income diversification. Two-thirds didn't require family members to be qualified for their jobs when entering the business, and 25 percent said the next generation was...