Yet despite these potentially knotty complications, 73 percent of family business owners say they don’t have a documented succession plan in place, according to a survey by PricewaterhouseCoopers.
And attorneys say that’s unwise.
“There are a lot of aspects to an effective succession plan and varying levels of expertise are needed,” says Bryce Mackay, an attorney with Jeffers, Danielson, Sonn & Aylward, (www.jdsalaw.com) a firm that includes family businesses among its clients.
He and colleagues Lindsey Weidenbach and Evan McCauley say numerous snags may emerge.
“One of the biggest issues is that business owners don’t give themselves enough time to implement a plan,” Mackay says. “Succession planning isn’t something you can do in a week or two. To be effective, the client should begin planning years in advance.”
Questions also arise about whether younger family members even want to take over. Just 30 percent of family businesses survive into the second generation, according to the Family Firm Institute.
“The next generation doesn’t always have the same passion,” McCauley says. “In small communities, adult children may have moved to bigger cities and may not want to return.”
Whether the younger generation is ready or not, there’s an upswing in the number of family businesses being sold or passed on to someone else.
“A lot of wealth-transfer planning is happening because baby boomers are reaching retirement age,” Weidenbach says.
The attorneys say any family business considering a succession plan should:
- Act early. “If you come to us on your deathbed and want to transfer your family farm, we may be limited in what we can do,” McCauley says. For example, it can take years to implement tax structures to reduce tax effects on the transfer.
- Set goals. Who do you want to be your successor? Will it be someone inside or outside the family? Is transferring wealth to family members the goal, or is having enough money to retire the objective?
- Involve everyone. Family members should be involved, of course, but also professionals such as an attorney, a CPA, an investment advisor and active members of the business’s management.
- Choose a succession planner who will be around a while. Succession planning is a long-term endeavor. It’s best to avoid an attorney who’s likely to retire before the plan is fully implemented.
On occasion, a business owner has clear-cut succession ideas. But when attorneys start asking questions that plan might be revised or abandoned.
“Our goal is to determine whether the client’s initial plan will work from a practical standpoint,” Weidenbach says. “We try to steer the client to the best outcome, even if that’s not what they initially had in mind.”