One type of business planning which is often overlooked is business succession planning. These types of plans map out the strategy for a company upon the retirement of the current owners.
Business succession planning is typically not necessary for venture backed companies as the plans are built into the venture financing agreements. However, for family-owned businesses, succession planning is critical. In fact, while over three-quarters of American businesses are family-owned, less than one-third of these businesses continue to exist after the first generation of ownership. The downfall is based on lack of planning.
In creating a business succession plan, several key questions need to be answered. For instance, how will the ownership of the business be transferred upon the original owner’s retirement or passing? Who will manage the business at this point? What will happen to personal relationships with key clients once the original owner passes? By answering these questions sooner rather than later, many family-owned businesses will be able to make the succession to second, third and fourth generation businesses.
In addition to answering operational questions that will arise during a succession, a good business succession plan needs to be created to minimize tax consequences. For instance, without proper planning, the death of an owner of a family-owned business may cause a massive tax liability. This happens since the family of the deceased must pay estate taxes which can exceed 50% of the value of the estate.
As such, family-owned businesses in particular need to create business succession plans and need to do so as early as possible. Doing so will help the transition to the next generation of ownership of the business and maximize the wealth of these owner’s family.
By John Hester