Did you know that out of the estimated 18 million companies headquartered in the United States, more than 80% are family owned? It’s hardly surprising that these same family companies account for about 50% of the U.S. gross domestic product, and, furthermore, employ over 60% of the country’s workforce.
However, according to a recent SBA study, less than 33% of family-owned businesses survive the transition from first generation ownership to the second, and less than 15% make it into the third generation. Read on to find out the 2 main reasons good companies struggle after their founders leave, and what they should be doing now to prevent it.
The two biggest challenges facing established companies with 2nd generation leaders are:
- Federal estate taxes; and
- Poor management decisions by the new owners
While the tax issues can be usually be resolved with a visit to a competent tax attorney, bad management decisions by new owners can often be prevented with assistance from an experienced business attorney.
As a family owned business owner, it is imperative that you consult with a business attorney to develop an appropriate business succession plan. A valuable and useful succession plan will identify the key personnel who have the potential to fill important business positions in a company upon the departure of the present owner, or key employees. The succession planning process involves recruiting of superior employees, and the development of their knowledge, job skills, and abilities, to prepare them for advancement as 2nd-generation company leaders. The time to consider your company’s recruitment and training efforts, is now, not when your most valuable employees retire, resign, or (sadly) pass away.
The perfect management succession plan should recognize the skills, education, and experience that current and future employees (including those necessary “family” employees) need to have for the business to carry on. Naturally, some family members have the needed skills to operate the business, but you should also plan to bring in new employees to ensure business viability. Make sure your succession plan addresses the long-term direction of the company and the staff needed to develop and continue this plan.
Your succession plan should also address how you plan to exit your family-owned business. Your family may want to sell the business to the highest bidder upon your exit, or keep the business within the family. Whether you are selling your business, or transferring ownership, strategically planning your exit is key to maintain your current business structure, assets, and tax obligations. A consultation with a business attorney will help make sure you have a solid exit plan that all the different parties understand.
An experienced attorney will be able to provide you with the key legal tools you need to properly transfer or sell your family owned business to new owners. Oftentimes, second generation business owners will inherit a business and are not properly trained on how to manage it. How often have you seen employees promoted beyond their competency level due to their family ties instead of job performance? Obviously, this practice creates strife within a family and can result in the closing of the business. As difficult as it is, you must ask yourself “If this employee was not actually related to me, would I realistically hire them for the job they have?”
A business attorney will provide objective legal counseling while planning your family owned business succession. He can even be the go-between or peacemaker if necessary, and identify or draft the legal documents you need to protect your business from failure as your 2nd generation family members become full-fledged owners. Your transfer/sell agreement, for example, should contain a mandatory mediation provision whereby future legal disputes involving family members are settled without interruption to the business operation or company-killing, costly litigation.
The Law Office of Brandon Woodward P.A. is eternally grateful that you have visited our web site or read our blog. The materials and information contained here are provided for informational purposes only and are not to be considered as legal advice. For questions about business succession, corporate agreements, business entities or any other legal issues facing your business, EMAIL US, and we’ll give you a totally FREE consultation.