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This Father's Day, I'd like to share a personal story. In 1934, my grandfather started a business in New York City to manufacturer children’s coats. He was very successful, but he died in 1972 without having properly planned how the business would continue on without him. My father, who had worked in the family business his whole adult life, was not prepared to take over the business, nor did he have the requisite skill set. Twelve years after my grandfather died, the business was finished, having closed its doors in 1984. Estate taxes were not the culprit. Instead, neither my grandfather nor my father ever created a business succession plan, nor did either have an exit strategy.
Roughly 90% of American small businesses are family-owned. Sadly, the majority of these businesses will fail to continue on to the next generation. In fact, only around 1/3 of all family-owned businesses survive into the 2 nd generation and only a small fraction of those make it to the 3rd generation or beyond. Sometimes, this is because the subsequent generations don’t have an interest in inheriting or running the family business. Other times, as was the case with my father, it’s because they don’t know how to run it. The problem in either scenario is the same: a failure to plan.
While many business owners have the intent of passing on the family business to one or more of their children, they are often too busy running day-to-day operations, and simply do not have the time or energy to consider business succession planning. Moreover, the stress of identifying and then grooming a family member or employee you trust to take over your business is a potential hot potato for many families and is therefore often avoided. However, procrastination can be disastrous. Aside from procrastinating, here are some other ways that owners unintentionally sabotage business succession:
There is no quick or easy answer or solution. However, in most successful transitions to the next generation or the third-party desired successor, owners have taken the necessary business succession and estate planning steps to minimize the conflicts, minimize estate and income taxes, and insure that the business is in the right hands to maximize the chances of its success. Comprehensive business succession and estate planning is the best way to improve the odds that your company will continue when you are gone (and possibly to provide the funds for your retirement, if you want to stop work while you are living). Moreover, if a family member is not going to run the business when you are gone, then plans must be made for the family business to be sold to a third party, either at your death or when you exit your business.
Remember that estates in excess of the amount that passes free of estate tax, currently $11.7M, are subject to a 40% Federal estate tax (plus state estate tax, if you live in D.C. or Maryland, but not Virginia). Thus, when doing your business succession and estate planning, you must plan for the need to pay the estate tax. Where is the source of funds to pay the estate tax? Do you need to plan for liquidity at death though estate tax planning and/or purchasing life insurance? The solution to all of this may be setting up a structure within the estate plan that assures that the those in the business own and control as much of the business you want, while giving those not in the business other assets (or just an income stream from the business), so they can control their financial destiny, without interfering with the day-to-day operations of the business.
You’ve spend too many hours creating and operating your business to allow for it to all fall apart at your death or in other circumstances. Business succession and estate planning is critically important to the future success of your business, as well as to your own personal financial health and wealth. The best Father's Day gift you can give to yourself is to meet with an estate planning attorney.