Did you know that only 30% of family businesses survive beyond the founder’s generation? Family-owned businesses make up a large part of our country’s economy and yet very few have any sort of plan to successfully transition the business from one generation to the next.

Confucius once said, “A man who does not think and plan long ahead will find trouble right at his door.”

According to the Family Business Institute, only 30% of family businesses survive beyond the founder’s generation. During the next two decades, nearly 80 million baby boomers will retire and at the same time many will receive inheritances. It has been estimated that over $10 trillion will be transferred from the World War II generation to the boomers, which will be the largest intergenerational transfer of wealth in history. A large portion of this wealth is comprised of privately owned family businesses.

The numbers encompassing family businesses are quite impressive. Family-owned businesses are the foundation of the American economy, and a significant part of America’s wealth lies within them. Family businesses comprise 50% of U.S. gross domestic product, generate 60% of the country’s employment, and account for 78% of all new job creation.

Proper business succession planning, in conjunction with estate planning, is key to ensure that a business survives for generations ahead.

A business succession plan focuses on three main issues: ownership of the company, management transition, and tax planning. The specifics of how these will be addressed depend on the size and structure of the company. Typically the plan involves creating some type of buy-sell agreement:

  • Cross-Purchase Agreement Allows the partners or stockholders to purchase each other’s shares upon disability, retirement, death or some other triggering event. This style of agreement works well for partnerships and smaller corporations with up to three owners.
  • Stock-Redemption Agreement
  • Allows owners to sell their ownership interest back to the company in the event of incapacity, retirement or other triggering event. If an owner dies, their estate is required to sell the deceased owner’s interest back to the company. This type of agreement works well for larger companies with four or more owners.

  • Wait-and-See Agreement A hybrid type of agreement that allows the owners to delay the selection of a stock-redemption plan or a cross-purchase plan until the occurrence of a triggering event.

Estate and business planning go hand in hand as the business may be the largest asset in the family’s estate. A family business owner must have an estate and business plan – ideally created by the same advisor – to fully achieve desired goals and increase the odds of the business prospering for generation ahead.

The estate plan is about the business owner as an individual and should be designed to protect the owner in the event of incapacity during life, as well as planning for death. The personal estate plan will be the vehicle to transfer the ownership of the business. The business succession plan will be the vehicle to coordinate transfers of ownership amongst multiple members as well as management transition. Tax considerations affect both plans.

The success of the family – and its business – depends on integrated estate and business planning. It’s never too early to start planning to protect and preserve the legacy of the family business for future generations. Ready to sit down and talk about a plan for your family? I invite you to give me a call at 725 777 3000 or email ktyler@gtg.legal.

Cordially, Kristin Tyler