Family controlled businesses need a succession plan

The family itself can make succession planning a difficult subject for family owned businesses to broach

According to Conway Center for Family Business, 35 percent of Fortune 500 companies are family controlled and family businesses account for 64 percent of U.S. gross domestic product; generate 62 percent of the country’s employment; and account for 78 percent of all new job creation.

Here’s another statistic: Within the next 30 years, nearly all family owned businesses will lose their primary owner to death or retirement, and approximately $10.4 trillion of net worth will be transferred. However, nearly one-third of family owned businesses do not have a succession plan. This is not only potentially troublesome for the economy, but it is also bad for the business.

The importance of a succession plan and how to get started

Consider that one-third of family owned businesses have a succession plan, and 30 percent of family owned businesses survive the transfer to the second generation. The correlation between planning and surviving could not be more direct.

However, what makes succession planning difficult for family owned businesses is the family itself. For starters, the subject can be difficult to broach. Second, family variables such as who will step into the leadership role make such transitions more unique. Then there are taxes and fees to be considered, and if the plan accounts for a death, gift taxes and estate taxes.

To be on the right side of the statistics, start planning early. Here’s an overview of what your plan should strive to accomplish:

  • Inclusion: If you want to keep the company in the family, involve the next generation in its operations as early as possible – even if they are children. You want them to feel a sense of ownership and have an understanding of the company’s values, culture and position within the market.
  • Development: Identify potential leaders, and create a personal and professional development plan they are held accountable for fulfilling. This will help position them to be successful once they step into their leadership roles.
  • Vision: Formulate and communicate a short-, medium- and long-term plan for the company, and seek input from others. This will ensure that there are common goals and defined strategies for achieving them – with or without current leadership
  • Execution: Successful transitions involve plans that are clear, well defined, fair and transparent. Understand that some family members may not be satisfied with the outcome, but articulating rationale can help prevent conflicts and strengthen continuity.

Remember, each family is unique and each has its own history that shapes the company and its culture. Developing a focused plan is the best way to overcome these challenges.

The financial side of the succession plan

In simplest terms, succession planning is really about transferring ownership and control of a business to a new party. The better positioned the company is for success and the more attractive it is to buyers, the more value the company will have.

However, even if the plan is to keep the company in the family, financial needs and financial planning remain paramount. The following are several strategies often employed to transfer ownership of family owned businesses to the next generation. Goals include addressing the owner’s need for retirement income and minimizing transfer taxes.

  • Gifting: Forms of gifting include annual exclusion gifts, gift tax exemptions and gifts of family LLC interests. Gifts remove the value of the business interests from the business owner’s estate and also provides the owner with the opportunity to retain a voting interest in the business.
  • Sale: Two common sales strategies are installment sales and private annuities. An installment sale provides a steady stream of cash flow to the business owner and presents a clear transition of ownership of the business to children. A private annuity requires active children to make periodic payments to the business owner (annuitant) over the course of his lifetime. Annuity payments terminate upon the business owner’s death, so neither the business interest nor annuity is included in the owner’s estate for estate tax purposes. Also, because the private annuity constitutes a sale, the business owner can remove the business interest and future income for his estate without incurring gift or estate tax.
  • Estate freezing: A grantor retained annuity trust (GRAT) is a more sophisticated succession planning tool. It involves a one-time transfer of property in which the business owner (grantor) receives the right to receive a fixed amount of money over a specified term of years. For a GRAT to be most effective, the term should expire during the business owner’s lifetime. A key benefit is that interest remaining in the GRAT at the end of the term of years passes federal gift and estate tax free to remaining beneficiaries.

In each of the above categories, there are a number of other solutions. And just as your family and business are unique, the arrangement for transitioning your business to the next generation of family ownership is also unique. To ensure these unique needs are met, build a strong professional advisory team consisting of an attorney, CPA firm and bank. This team can provide you with the guidance your business needs to thrive in your absence, as well as ensure your financial needs are met for the remainder of your lifetime.

Jeff Taylor is vice president and relationship manager for Business Banking in KeyBank’s Vancouver office. He can be reached at (360) 449-8059 or at