Small businesses in the U.S. totaled 27.9 million in 2010, according to the U.S. Census Bureau. Many small business owners believe their family owned businesses will somehow continue without interruption regardless of what happens to them, even when they have no succession plan.
Here is an example of what can happen when there is no succession planning. In this scenario, small business owners, Bob and Beth, now in their late sixties, built a thriving family business over the past 40 years. Their daughter has worked in the business all of her adult life; whereas their son has never worked in it. Bob and Beth have yet not engaged in family business succession planning. They do not have any estate planning documents for such events as incapacity or death. Bob is now experiencing the first stages of dementia, and Beth has worked extra hours because of Bob’s illness. Beth has a heart attack, leaving their daughter in charge of the family business management. The daughter is terrified because she is not prepared to take over because she doesn’t yet understand the family business issues.
Sadly, few family business owners think about succession planning because they are in denial about retirement, health issues, or premature death. CEO succession planning addresses who will replace key persons in the business and creates an action plan for the next generation for keeping or selling the business, whatever is provides the maximum benefit to the family.
Owners of family businesses often come to us with fixed ideas of how their business succession will occur. Most have never been involved in developing a succession plan. There are many misconceptions. In future articles, we will identify the myths small business owners have about what it takes to successfully hand off the reins to the heirs. There are powerful emotions and family dynamics that can make the small business owner put off succession planning, and they fail to take action so the business thrives.
Below are some common myths about succession of the family business:
Myth Number 1: Don’t Worry, No Problem – There is ample time to plan.
Most small business owners think they have plenty of time to establish a succession plan. In truth, time will either help or hinder you. So, when should you start? A small business owner may invest time up front to plan for succession so it can be continually updated. A family business own may wish to wait until later, perhaps next year, or the year after that, causing the contingency planning to be postponed into oblivion. A lack of succession planning can lead to uncomfortable, stressful, uncertain, and expensive situations for beneficiaries.
Start early. Don’t wait another day. Select a successor. Assemble a team comprised of your CPA, a financial advisor, and a business lawyer to develop a succession plan in a calm, deliberate manner. This is one of, if not the most important, act of love to the next generation of the family.
Myth Number 2: When you transfer ownership, you lose control and income.
Many small business owners fall prey to thinking a succession plan is an all or nothing proposition. Transferring ownership of the family business – as this type of thinking goes – gives up the founder’s control and reduces his or her income. The founder of a family business can create a succession plan to transfer ownership without losing control or income, continuing to lead the business, be paid for doing so, and not lose the management role.
Succession planning is good business because establishing and implementing a business succession plan will cause financial benefits, tax advantages, and personal satisfaction for the small business owner and his or her family. The earlier a founder of a family business begins planning his or her exit strategy, the more likely it is that the succession plan will succeed. Some small business owners believe creating a succession plan is not worth the trouble, that it is a lot of pain for little gain. These founders often never considered the long-term tax advantages of transferring a portion of the business ownership sooner rather than later. Planning strategies that make use of federal gift and estate tax exemptions by transferring ownership of the family business to a successor over time, but still preserving control and income to the founder, can cause significant, lawful, savings in federal and state taxes sometimes amounting to millions of dollars.
This is the first of a series of articles about family business succession planning. Stay tuned for more. This article is not intended to provide legal advice. The facts of your situation are unique and you should seek the guidance of a business law attorney. Call us at 813-852-6500 to schedule a free 30-minute consultation with a business lawyer.