Are your clients prepared for transition? The primary points to consider include: financial independence, estate planning, a business plan to build value, management succession, and ownership transition alternatives.
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In this and future articles, I will discuss all of these areas, but as an introduction, let’s look at family businesses and some common misconceptions.
Question: What percentage of the Gross Domestic Product is generated by family businesses?
The answer is 64 percent. The entrepreneurial spirit in America is alive and well. But, will the family businesses survive long-term? Here are some interesting facts from the 2007 Family Business Survey:
Question: What percentage of family businesses have a written strategic business plan?
Question: What percentage of family businesses have a written succession plan?
Question: What percentage of family businesses have little or no income diversification? (All their “eggs in one basket”)
Sadly, family businesses tend not to create formal plans for growing and sustaining their businesses. Only 56 percent have a written strategic business plan and only 30 percent have a written succession plan. And, the percentage of family businesses with little or no income diversification is a surprising 93 percent!
Many owners of closely-held businesses have misconceptions about succession planning. Some of the common myths – and truths – follow:
Myth: I have completed my Will; therefore I have done succession planning.
Truth: Estate planning only covers one component of succession.
Myth: The more family members I employ in the business, the better off we will be.
Truth: The greater the number of family members in the business (including as shareholders) generally leads to lower profitability.
Myth: Putting my son/daughter in charge will make him/her a better leader.
Truth: Children with a proven, independent track record have an excellent chance of winning the respect of the employees and of the community which results in stronger leaders.
Myth: I don’t need a succession plan because I don’t plan on leaving for a long time.
Truth: Some things are within your control but this is not one of them.
Myth: Treating my children equally is the best approach to minimizing family conflict.
Truth: Equal division is generally not possible.
The bottom line: Transition is inevitable. A succession plan will be successful if five critical areas are addressed: They include:
→ Business Financial Planning
→ Personal Financial Planning
→ Management Succession Planning
→ Estate Planning
→ Ownership Transition Planning