Family Business Succession Planning

Operational and Tax Strategies Ensure a Smooth Transition
By Melanie M. LaSota

Statistics reveal that 17 million U.S. family businesses generate 64 percent of gross domestic product and account for 86 percent of new job creation. Unfortunately, less than one-third of family-owned businesses survive the transition to the second generation. Of those that endure, less than half are passed on to the third generation. This failure rate can be attributed partially to a lack of succession planning. Although most family business owners welcome the prospect of eventual retirement, many fail to establish a financial framework for a smooth transition to future generations. 

Choosing a successor ranks among the most complex and emotionally challenging decisions owners face when crafting exit strategies. Selection among multiple children without triggering family discord is a delicate balancing act. In some cases, the child most qualified to assume control of the business lacks the passion to do so, or the child who wants to continue the family legacy the most lacks the business savvy necessary to run a competitive enterprise. To complicate matters, many owners are burdened by a desire to pass the company to the children who actively participate while providing equal treatment to children who chose alternate career paths. 

Fortunately, strategies exist to manage these complications. To equalize treatment among children, an owner may pass the company to participating offspring and purchase life insurance policies to provide for children who are inactive in the business. Alternatively, a business owner may consider providing offspring with equal ownership of the business, with participating children receiving voting rights and inactive children receiving non-voting interests. 


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