Failing to Plan is Planning to Fail
Most subcontracting firms are closely held businesses owned by either a family or a small cadre of owners. Running the business generally overshadows thinking about the next generation of ownership. The reality is that failing to plan for ownership transition can destroy the business that owners are working so hard to build. In Part 1 of Succession Planning, we discuss why planning for ownership transition is critical for your business. In our next installment, we will discuss some of the key tools and concepts you need to understand, in order to accomplish a successful ownership transition.
Why engage in business succession planning?
Business succession planning is the ongoing process of planning for the inevitable change in leadership that takes place in any business over time. Owners need to identify and develop individuals who have the potential to fill key leadership positions within the company. A critical part of this effort is preparing for negative events such as the disability, illness or death of a key employee. Life events such as divorce, illness or disability, and retirement or death can happen suddenly and have a major impact on an existing business.
Without proper planning, these events can cripple a small or family-owned business. According to the Family Business Institute, only about 30 percent of family-owned businesses survive into the second generation, 12 percent still are viable into the third generation, and only about 3 percent of all family businesses operate into the fourth generation or beyond. The research further indicates that such business failures essentially can be traced to one factor: an unfortunate lack of family business succession planning.
The typical small business owner may think such planning and leadership development is more the realm of large Fortune 500 companies. While larger companies have larger pools of resources and employees from which to draw, planning is just as critical or even more so for the small business. The loss of a single key employee can be the death knell of a small business without proper planning, training and thought.
Recently, the discussion of business succession planning came front and center in the sports world when people started to ask what the owner of the Oakland Raider’s NFL Football Team (now 82 years old) planned to do with his majority interest in the team upon his death? Would a member of his family take over the team? Or would the team have to be sold? The questions are the same, no matter what the size of your business. And, like many things in life, the sooner you start to plan, the better.
Businesses that fail to plan not only run the risk of experiencing a void in strong leadership within the organization, but also are led to unnecessary monetary losses and avoidable tax liabilities. According to an article published by Bizjournals.com, estate taxes alone can claim between 18 percent and 55 percent of a taxable estate, frequently resulting in businesses having to liquidate or take on tremendous amounts of debt, just to stay afloat following an owner’s death.
Even with recent federal action with respect to estate taxes, small business transitions on death can result in high value transfers of ownership interests that can cause significant estate tax liability. Owners need to consider their liquid assets and whether they are sufficient to offset such taxes as part of estate planning and business succession planning. Timing can be critical, too, as many individuals forced to sell real estate in the last couple years can attest.
Addressing these issues fits into an intersection of multiple professionals. Your financial planner, your accountant, your lawyer and your insurance broker should be familiar with your situation and work as a team. Successful planning requires communication, cooperation and understanding from each member of your team.
Business succession planning is critical to the long-term health and viability of your operations. In our next installment, we will discuss some of the important tools and concepts that you should understand to accomplish your business transition goals.
- 47April 2013 Government Affairs Estate Tax Op-Ed Congressman Tom Rice (SC-07) Family business owners and entrepreneurs are all too familiar with our country’s onerous estate tax. The fiscal cliff negotiations at the end of last year halted the 55 percent estate tax rate from again taking effect, but the negotiated 40 percent rate and $5.12…
- 40April 2014 Government Affairs Opinion: Small Businesses Bear Brunt of Health Care Law Rep. Sam Graves (R-MO) Another week, another failure of the President’s health care law comes to light. New problems surface before the ink can dry on previous reports of problems. Last month, a report from the nonpartisan Office of the Chief Actuary…
- 39February 2011 Government Affairs Reenergizing our Economy House Small Business Committee Chairman Sam Graves Reenergizing our economy and rekindling the American spirit of entrepreneurship must be the central focus of the 112th Congress. The small business owners who create the majority of new jobs need a government that will work with them – not against…
- 37August 2012 Government Affairs Small Businesses Drive Job Creation, Growth Congressman Sam Graves, Missouri Our nation is the mightiest economy on the planet, with great potential for growth. So why are we nearly stagnant? We’ve had weak job growth for months on end, and our lingering high unemployment has been at a rate of at…
- 36January 2012 Legal Issues Business Succession Planning Part II: Critical Tools By Timothy R. Hughes, Esq. and Lauren K. Keenan, Esq. Editor’s Note: In Part I of business succession planning, the critical importance of business succession planning to the small or family-owned business was discussed. In Part II, some of the common tools used for…