If you own a family business, then business succession planning must be a priority. Eventually, you will want to retire. But with a family-owned business, it is not as simple as turning in your letter of resignation and simply not going in to work anymore. Your only concern is not whether you will have sufficient income to retire comfortably, but more importantly, what will become of the business. Questions like: who will take over management of the business and how will ownership be transferred, must be answered.
Why is succession planning necessary?
According to one survey, most business owners intend to pass their business on to their children, but less than 30% of them have a succession plan in place. Although the majority of owners plan to pass on their business, only 30% actually do so successfully. It seems pretty clear from these numbers that succession planning is necessary.
What are the benefits of creating a succession plan?
If it is your intention that your business be passed on to relatives, a succession plan can provide for a smooth transition of ownership. Whenever you deal with family businesses, succession planning can be more complicated due to the relationships and emotions involved. Combine that with the delicate issues of aging, death and finances, the planning can be difficult.
As a result, nearly 70% of family-owned businesses do not survive the transition to the second generation. The two factors that lead to this failure are taxes and family conflict. A good business succession plan can address both of these issues.
What is required in a good business succession plan?
There are three main areas that are typically addressed in a business succession plan: ownership, management and taxes. Contrary to what many clients believe, ownership and management are not always the same. It may be that you want to transfer management of the business to one child, but give equal ownership shares to all of your children. Not all heirs are required to be actively involved in the business.
The importance of tax planning
Minimizing taxes on an estate upon death is the focus of the tax planning aspect of succession planning. There are a number of tax strategies that can be used to help reduce taxes, including establishing and locking in the value of your interest in the company, while ownership is being transferred to your children. Attorneys who specialize in business succession planning will be able to provide the necessary advice regarding such tax strategies.
Start your business succession planning now
If your true goal is to keep your family business growing from one generation to the next, waiting to create a business succession plan is the worst thing to do. A good succession plan should be put in place early, to ensure that you have the funds you need to retire comfortably, and that your family-owned business will continue to grow in the hands of the next generation.
If you have questions regarding succession planning, or any other family-business planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.