Houston Estate Planning and Elder Law Attorney Blog
Whether on the evening news or a serial drama, we love to watch the inner workings of family businesses—in large part because of the drama and the high likelihood of failure.
The narrative of family dynasties is intriguing. According to the Yakima Herald in "Passing the baton: 6 challenges for family business succession," that is because successfully transitioning from one generation to the next is extraordinarily challenging and statistically unlikely. The low levels of success are matched by high expectations of business owners who believe that somehow, someway, their family will continue to control the businesses. Their viewpoint is highly optimistic and—most often—wrong.
Whether it's a national chain of supermarkets or a mom and pop corner grocery, owners will face several obstacles when seeking to ensure that their business legacy continues with and through their children. Here are some common challenges to consider.
Conflict. Very few—fewer than 25%—of family businesses have done any succession planning. This fuels the potential for disharmony. One of the big reasons not to have a formal succession plan is that it'll cause family conflicts. There are tough decisions to be made—and it's often seems easier to avoid them.
Income. Revenue distribution and work compensation is a potential minefield. When you bring in someone from the next generation to the company, some folks try to combine that person's compensation with their anticipated inheritance. That's no good because it will provide more compensation than is right for the position, creating a family member's inflated sense of worth to the business and angry employees.
Interest and Involvement. An owner with several children may have some offspring who are just not interested in being a part of the family business. Nonetheless, they'll all expect an equal share, which might frustrate those siblings who worked years to make the business successful.
Technology. An owner may be reluctant to accept changes in methods and procedures, resisting new technology they don't understand. But the technological advances that a young generation brings can translate into efficiency and improved profit margins. It's a balance.
Uncertainty. Some business owners postpone succession planning because they think they'll be around for many more years. But illness and death can occur suddenly. With that in mind, the most successful succession plans are typically those that are in place the longest.
Regulation and Taxes. When a business is transferred to a new generation, there can be serious tax consequences. This needs to be part of the plan, especially as an onerous tax burden could force heirs to sell all or part of the business to raise capital to pay the tax bill. That's why business owners need up-to-date estate plans that leverage tax regulations on wealth transfer and gifting.
The only sure thing about passing a business on to the next generation is the difficulty factor. Those who do succeed start planning decades in advance, often calling on outside sources that are trusted and respected by the owners and other family members. Plans need to be reviewed on a regular basis because situations change. The key is communication among family members and getting everyone to keep their eye on the main goal: the continuation of the family business.
Reference: Yakima Herald (May 20, 2016) "Passing the baton: 6 challenges for family business succession"