Effective Succession Planning for the Family Business
Family businesses comprise the vast majority of businesses in America. They produce approximately 50 percent of the country's Gross National Product. Sadly, fewer than 30 percent of family businesses successfully transfer from the first to second generation. These numbers are due in part to the obstacles with the succession of these businesses. There are many factors to keep in mind when planning the succession of a family business.
It is essential that the business owners, often the parents, are financially prepared tor this transition. Making this move prematurely can be devastating to their retirement planning, financial security, and the success of the business.
The business owner also needs to be mentally prepared for this major life change. Leaving a business one has built from the ground up can be quite a challenge. Having plans for how one's time will be spent, once they are no longer running the business, will lead to greater success.
Children are often successors in a family run business. Just because they have grown up with the business doesn't mean they know how to run it. Succession planning needs to ensure that the successors have the critical skills and experience needed to successfully be in charge of the business.
It is important to the family and the business to transfer the business with the least tax cost possible. There are many gifting strategies that can be used to minimize the tax burden. It is important to consult with experienced professionals such as appraisers, attorneys, and accountants to maximize discounts on gift and estate taxes.
Get it in writing. Many people neglect to put in writing business agreements within the family. Disagreements are more likely with the transfer of a business when it is just an oral agreement which can lead to more confusion, frustration, and anger.
It may be fairer to the successors and better for your business to not give everyone an equal share of the business. Management and ownership of the business are not the same. It may work better to transfer more to those who are running the business. Other financial arrangements can be made for your other children.
Be prepared for a possible IRS audit. With the help of an appraiser, properly value the amount being transferred. The IRS has three years to audit and challenge the value gifted. If you can't document the value of the business, the IRS may determine its market value and tax accordingly.
It is important for the successors, even if they are your children, to invest in the business. Businesses that are entirely gifted are often destroyed and family relationships are strained and damaged. Success is much more likely when family businesses are sold to family members.
Prepare for the unexpected. If you want the business to stay in the family, a trust or a buy-sell agreement is a good idea. Discuss this with your attorney. This can keep the business in your family should the unexpected happen in your family such as death or divorce.
Succession planning is an ever-evolving process. Keep it up to date! They need to be kept current through regular updates and revisions. Family members' interest in the business may change and the structure of your family may change. Additionally, the value and structure of the business may change which will impact your plan.
A succession plan is important to the success of your business, retirement, and family. Create it well ahead of time. There are many factors to consider as part of the planning process. Determine the best strategy for the succession of your busines with Shoffner & Associates, counselors to small business.
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Freya Allen Shoffner, Esq.
Shoffner & Associates
Counselors to Small Business and Families.
Give Freya a call at (617) 369-0111 TEXT US (857) 524-3422 or email firstname.lastname@example.org