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October 2008

Estate Planning

Saving the Business — and Estate — When You're Gone

In recent years, there has been an increased public awareness of the high mortality rate among family-owned businesses when the founder or founders die. The reason most often attributed is the absence of an effective estate and business succession plan.

After we decided more than 20 years ago to focus our firm on assisting family-owned enterprises in their battles to survive, this dilemma was continually brought to our attention. It is still astonishing when we become aware of yet another business and industry leader who, after a lifetime of success, will also be remembered for fumbling the ball at the one-yard line and forcing his business to be sold because of inadequate planning.

Virtually every community in the United States has examples of successful businesses that were sold because of either poor or no planning. Recognizable names like the Robbie and Wrigley families were forced to sell the Miami Dolphins and Chicago Cubs, respectively, to raise enough cash to pay estate taxes.

MCAA business owners should be particularly aware of the pitfalls they must avoid to successfully pass their enterprises on to their intended successors. Many business owners are unaware of how severe a lack of estate and succession planning could be. It literally can, and many times does, mean the forced sale of the company you've put a lifetime of hard work into building. Do you really want that to be your legacy?

A common, but inaccurate, belief is that most successful business owners have successfully completed this type of planning. Studies show that only 40 percent of business owners have prepared adequately for the succession of their operations. This is a startling statistic for a group of people who have demonstrated exceptional skills in building their businesses.

In general, we are referring to individuals who started with modest financial assets but built on their dreams, and this includes a large number of MCAA companies. Quite often, the only source of seed money to start their companies would come from borrowing against their homes, risking their families' stability if the venture failed. Why is the incidence of losing a family business so great among a group recognized for exceptional business savvy?

A profound number of these cases can be directly attributed to the founder's fear of relinquishing the reins. A common trait among business owners is their insecurity in delegating their responsibilities to potential successors.

Many people simply wait too long to do business-succession planning, and the business is often liquidated to pay estate taxes, due nine months after death. There are many other complications in passing on a family business. In many cases, the owner's income and assets are tied up in the business. The owner generally will not transfer assets to the second generation without receiving value in return.

Beyond the financial aspect, a transfer of authority often is emotional. The owner feels not only the loss of control of the business he founded and built from the ground up, but also the loss of financial security.

Other issues that may come into play are sibling rivalry, a lack of management skill in the succeeding generation, or family members who avoid discussing details of a transition. Many family business owners avoid discussing the issue of succession, because they fear it may cause a rift within the family. Instead, it causes resentment and an uneasy feeling of not knowing what is going to happen with the business.

An issue that is critical to all members of a MCAA family business is what will happen to the business after the departure of the founder. If the children have committed themselves to a career in the business, the founder has a moral obligation to share his intentions with them.

The succession issue should be addressed at least seven to 10 years before the owner expects to retire, and it should be discussed well before then. This provides enough time to work with the family members who are active in the business to bring about a smooth transition.

Waiting too long to put a succession plan into effect can damage the business in many ways. Bank owners, especially, will be more comfortable and confident if they know the business is going to continue after the founder steps down.

Most owners face the same two choices: They can pass the business to family members, or they can sell to an outsider. In either case, they must identify who will manage the business and work through the transition if the business is to survive.



    ©2008 by the Mason Contractors Association of America
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