Succession planning.

Author:Witzke, Michael P.
Position:Finance - Family-owned businesses

Over the next several years, it is estimated that over 40 percent of the nation's family-owned businesses will change leadership. Unfortunately, only about 30 percent of these businesses will be successfully transferred to the desired family members, and fewer than 15 percent will make it to the third generation.

By avoiding these three mistakes, you can increase the odds that your family business will continue in the family:

  1. Assuming that control, income and value are tied together. Most business owners think of their business as just that--a business. However, a business has three distinct parts: (1) an individual or individuals that control the operation; (2) income; and (3) value which the IRS would assign to that business upon the primary owner's death. These three pieces can be separated so that the owners can retain control and income, but shift the value of the business down to the next generation. Most first-generation business owners do not want to lose control of the operation of the business. Using proper planning, a significant portion of the value of the business can be shifted downstream, but allow the business owners to retain control and, most importantly, retain income from the business for as long as they desire.

  2. Ignoring the sell vs. keep decision. One of the first questions that a family business-owner has to consider when thinking about succession planning is: "Should I leave this business to my family?" It may be possible that a lot of the business' value is tied to that first-generation owner, and if he or she were to die, the business would not be able to be continued by the adult children. It may be far better to sell the business while the first-generation owner is involved and get top dollar for that business. It is then possible to transfer down to the next generation the proceeds of the sale. This is a tough question but must be considered by the business owner as part of the overall plan.

  3. Falling to treat heirs fairly. In many cases only some of the adult children will be active in the business. Other offspring may take no interest and do not participate in the business. How you treat heirs or descendants with different interests is often one of the toughest decisions to be made by a business owner. Treating them fairly does not necessarily mean treating them equally. A business owner whose son or daughter has been active in the business for years and whose efforts have led to an increase in the value of...

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